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Innovation in Business,
Economics & Finance 1
—
A New World
Post COVID-19
Lessons for Business,
the Finance Industry
and Policy Makers
edited by Monica Billio and Simone Varotto
Edizioni
Ca’Foscari
A New World Post COVID-19
Economics & Finance
Series coordinated by
Carlo Bagnoli
1
Economics & Finance
General Editor
Carlo Bagnoli (Università Ca’ Foscari Venezia, Italia)
Advisory Board
Carlo Bagnoli (Università Ca’ Foscari Venezia, Italia)
Giorgio Bertinetti (Università Ca’ Foscari Venezia, Italia)
Monica Billio (Università Ca’ Foscari Venezia, Italia)
Alfonso Dufour (University of Reading, UK)
Steven Ongena (University of Zurich, Switzerland)
Loriana Pelizzon (Università Ca’ Foscari Venezia, Italia)
Marti G. Subrahmanyam (Stern Business School, New York University, US)
Simone Varotto (ICMA Centre, Henley Business School, University of Reading, UK)
e-ISSN 2610-9522
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URL http://edizionicafoscari.unive.it/it/edizioni4/collane/innovation-in-busi-
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A New World Post
COVID-19
Lessons for Business,
the Finance Industry
and Policy Makers
Venezia
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A New World Post COVID-19. Lessons for Business, the Finance Industry and Policy Makers
Monica Billio, Simone Varotto (edited by)
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A New World Post COVID-19. Lessons for Business, the Finance Industry and Policy
Makers / Monica Billio, Simone Varotto (edited by) — 1. ed. — Venezia: Edizioni
Ca’ Foscari - Digital Publishing, 2020. — 374 pp.; 23 cm. — (Innovation in Business,
Economics & Finance; 1).
URL https://edizionicafoscari.unive.it/en/edizioni/libri/978-88-6969-443-1/
DOI http://doi.org/10.30687/978-88-6969-442-4
Lessons for Business, the Finance Industry and Policy Makers
edited by Monica Billio, Simone Varotto
Acknowledgements
The editors would like to thank Charles Sutcliffe for his continuous encouragement
from the early stages of this project, and Adrian Bell and Carol Padgett for their support.
We wish to thank all contributing authors for sharing their expertise, and the following
colleagues for providing constructive feedback and suggestions for improvements to
the authors: Nikolaos Antypas, Nick Bardsley, Adrian Bell, Alfonso Dufour, Kecheng Liu,
Gianluca Mattarocci, Peter Scott, Carl Singleton, Charles Sutcliffe and Alexander Wag-
ner. We thank Massimiliano Vianello and Mariateresa Sala of Edizioni Ca’ Foscari for the
invaluable help and professional advice during the production of this volume. We are
grateful to the ICMA Centre for financial support which has made it possible to present
this volume in a freely accessible format through Gold Open Access. A special thank you
to Leonardo Varotto for his help with the conceptual design of the front cover.
Table of Contents
Introduction
Monica Billio, Simone Varotto 13
PART 1. HISTORICAL PERSPECTIVE
The Global Financial Crisis and the COVID-19 Pandemic

Antonio Moreno, Steven Ongena,
Alexia Ventula Veghazy, Alexander F. Wagner 23
What Can the Black Death Tell Us About

the Global Economic Consequences of a Pandemic?
Adrian R. Bell, Helen Lacey, Andrew Prescott 35
PART 2. FISCAL AND MONETARY POLICY
Recovering from the Economic Impact of COVID-19

Who Should Pick Up the Bill for the British Lockdown?
Peter Scott 45
The European Repo Market, ECB Intervention

and the COVID-19 Crisis
Monica Billio, Michela Costola,
Francesco Mazzari, Loriana Pelizzon 57
COVID-19 and Fiscal Policy in the Euro Area

Filippo Busetto, Alfonso Dufour, Simone Varotto 69
PART 3. BANKING, RISK AND REGULATION
The Effects of the COVID-19 Pandemic Through the Lens

of the CDS Spreads
Alin Marius Andrieș, Steven Ongena, Nicu Sprincean 85
Market Risk Measurement

Preliminary Lessons from the COVID-19 Crisis
Emese Lazar, Ning Zhang 97
PART 4. FINANCIAL MARKETS
COVID-19 and the Stock Market

Stefano Ramelli, Alexander F. Wagner 111
Stock Performance When Facing the Unexpected

Alfonso Dufour 125
The COVID-19 Challenge to European Financial Markets

Lessons from Italy
Nicola Borri 137
Portfolio Effects of Cryptocurrencies During

the COVID-19 Crisis
María de la O. González, Francisco Jareño, Frank S. Skinner 149
PART 5. COMMODITIES AND REAL ESTATE MARKETS
Will COVID-19 Change Oil Markets Forever?

Yelena Kalyuzhnova, Julian Lee 165
Real Estate and the Effects

of the COVID-19 Pandemic in Europe
Gianluca Mattarocci, Simone Roberti 177
PART 6. BUSINESS PERFORMANCE, FUNDING AND GROWTH
Private Equity & Venture Capital

Riding the COVID-19 Crisis
Keith Arundale, Colin Mason 193
Mergers and Acquisitions in the Years of COVID
Slowing Down Before Accelerating Yet Again
Nikolaos Antypas 205
On the Impact of COVID-19-Related Uncertainty

Marta Castellini, Michael Donadelli, Ivan Gufler 219
PART 7. PENSIONS AND INSURANCE
The Implications of the COVID-19 Pandemic for Pensions

Charles Sutcliffe 235
Insurance Risk Management During Pandemics

Michalis Ioannides 245
PART 8. CLIMATE CHANGE
Pandemics, Climate and Public Finance

How to Strengthen Socio-Economic Resilience
across Policy Domains
Stefano Battiston, Monica Billio, Irene Monasterolo 259
Avoiding a Great Depression in the Era of Climate Change

Nicholas Bardsley 269
PART 9. LABOUR MARKET
COVID-19 Pandemic and Gender Inequality

in the Labour Market in the UK
Giovanni Razzu 281
India’s Lockdown and the Great Exodus

Some Observations
Arup Daripa 291
Human Skills & the AI COVID Challenge

Naeema Pasha 301
COVID-19 and Its Impacts on Talent Mobility in China

Mikkel Rønnow Mouritzen, Shahamak Rezaei, Yipeng Liu 309
PART 10. AI AND BIG DATA
Artificial Intelligence and Data Analytics

in Digital Business Transformation Before,
During and Post COVID-19
Kecheng Liu, Hua Guo 325
Reshaping the Future

Unlocking the Potential of Alternative Data
for the Post-COVID-19 World
Hung-Yi Chen 333
PART 11. TRAVEL, TOURISM AND ENTERTAINMENT
Travel and Tourism

At the Frontline of COVID-19
Adrian Palmer 341
European Football After COVID-19

J. James Reade, Carl Singleton 349
PART 12. POLITICS: PROTECTIONISM AND POPULISM
Why Collaboration Needs to Win Over Protectionism

Benjamin Laker 361
The Political Implications of COVID-19

What Now for Populism?
Daphne Halikiopoulou 367
With gratitude, to all essential workers
and to all those who behave responsibly
to prevent another wave
Introduction
Monica Billio
Università Ca’ Foscari Venezia, Italia
Simone Varotto
ICMA Centre, Henley Business School, University of Reading, UK
Pandemics are disruptive events that have profound consequences

for society and the economy. This volume aims to present an anal-
ysis of the economic impact of COVID-19 and its likely consequenc-
es for our future. This is achieved by drawing from the expertise of
authors who specialise in a wide range of fields including fiscal and
monetary policy, banking, financial markets, pensions and insurance,
artificial intelligence and big data, climate change, labour market,
travel, tourism and politics, among others. We asked contributing
authors to write their chapters for a non-technical audience so that
their message could reach beyond academia and professional econ-
omists to policy makers and the wider society. The material in this
volume draws from the latest research and provides a wealth of ide-
as for further investigations and opportunities for reflection. This al-
so makes it an ideal learning tool for economics and finance students
wishing to gain a deeper understanding of how COVID-19 could in-
fluence their disciplines.
The volume begins by taking a historical perspective. Moreno, On-
gena, Ventula Veghazy and Wagner explore the linkages between the
Great Recession of 2008-09 and the current pandemic. They argue
that the ways in which the former crisis was fought may have a bear-
ing on the severity of the outcomes of the current crisis. Governments
that piled up debt to bail out banks in their country may have divert-
ed resources away from critical sectors including public health ser-
13
Monica Billio, Simone Varotto
Introduction
vices. This in turn may have curtailed the ability of those countries to
contain the spread of the virus and offer adequate health treatment
to the sick. Similarly, job losses following the Great Recession, espe-
cially among young people (e.g. in Italy and Spain) may have created
a greater incentive for younger generations to live at home with their
parents. Such proximity between younger and older people, with the
latter more vulnerable to the infection, may have led to higher mor-
tality rates during the pandemic. Finally, forbearing bank supervi-
sors that have allowed banks to keep in their balance sheet ‘zombie’
firms following the last crisis may have created the pre-conditions
for government funding to fall in the ‘wrong hands’ of failing compa-
nies, rather than healthy ones, during the current crisis.
Historical comparisons are further stretched back by Bell, Lacey
and Prescott who look at the lessons from the Black Death of 1348-
51, which may still be relevant today. They argue that restricting
freedom of movement, especially if protracted in time, can generate
resentment and lead to social unrest and political turmoil. Events in
fourteenth century England suggest that governments need to act
quickly to address social injustice when social tension is high be-
cause of a pandemic. History also teaches us that psychological re-
actions of crisis-affected masses may lead to nationalistic tenden-
cies. This is further explored by Halikiopoulou who focuses on the
rise of populism in Europe. The author distinguishes between coun-
tries already dominated by populist movements and those where pop-
ulists are in opposition parties. A pandemic, and the resulting eco-
nomic crisis, may create an opportunity for populists in opposition
to gain more support from the voters that are worst affected by the
economic downturn. A likely consequence of ‘my-country-first’ poli-
cies, which can find quick appeal in periods of economic and health
crises, is protectionism. Laker identifies clear signs of protectionist
trends emerging from the pandemic and warns that these can have
disproportionate consequences for developing economies as they are
more dependent on imports for critical medical supplies and their
population’s basic needs.
The UK experience during the First and Second World Wars as well
as the Great Recession is examined by Scott to shed light on the fis-
cal implications of COVID-19 and the likely consequences for British
taxpayers. He argues that the austerity measures that could follow
fiscal expansion during the current pandemic would be misguided.
Past events suggest that fiscal austerity may have the unintended
consequence of slowing economic growth and generating mass un-
employment, while a less fiscally conservative approach would lead
to a stronger and sustainable recovery.
Busetto, Dufour and Varotto extend the fiscal policy analysis to
continental Europe. They show that pre-existing debt levels influence
governments’ ability to sustain their pandemic-hit economies. Ger-
Innovation in Business, Economics & Finance 1 14
A New World Post COVID-19, 13-20
Introduction
many’s relatively low debt-to-GDP ratio has helped it to implement a

‘fiscal bazooka’ to protect its economy without paying the price of a
substantially higher cost of borrowing. Italy, on the other hand, with
a more contained fiscal expansion, is expected to experience a more
punitive increase of its borrowing costs. This, in turn, would have a
further negative impact on its already anaemic growth prospects.
Financing costs in European countries are also explored by Billio,
Costola, Mazzari and Pelizzon who look at the repo market. Specifical-
ly, they focus on the effect on repo rates of monetary policy announce-
ments made by the European Central Bank (ECB) during the pandem-
ic. They find that countries in Europe’s periphery, e.g. Italy and Spain,
may be highly dependent on the ECB support to keep their repo rates
in line with those of other countries. An announcement made by the
ECB that it would not intervene to support countries with higher sov-
ereign risk was sufficient to generate a substantial divergence of their
repo rates from those of low risk countries. A subsequent ECB an-
nouncement which clarified that the Central Bank would indeed sup-
port weaker economies caused an immediate realignment of the repo
rates. This highlights the critical role that monetary policy can have
to contain the effect of the pandemic on financial markets.
The connection between sovereign risk and bank risk has become
more evident since the European sovereign debt crisis. Andries, On-
gena and Sprincean observe that such connection and feedback loop
have become stronger during the pandemic but are not as important
as they were during the sovereign crisis. This is partly the result of
stricter bank regulation that has made banks better able to with-
stand periods of instability. Lazar and Zhang examine in detail some
aspects of the new bank rules and conclude that they might lead to
banks overestimating risk and keeping higher than needed equity
capital levels, which are sub-optimal.
Stock markets reacted strongly to the spread of COVID-19. Ramel-
li and Wagner analyse the stock performance across 90 countries in
different phases of the crisis: incubation, outbreak, fever and recov-
ery. They find highly levered companies to be the ones with a more
volatile behaviour, which confirms the role of debt in amplifying eco-
nomic shocks and uncertainty. Worryingly, corporate debt levels have
increased since the start of the pandemic, which may contribute to
further market instability in case of future outbreaks of the virus.
This has reawakened the debate about whether corporations should
still be incentivised to pile up debt through the tax deductibility of in-
terest payments.1 The authors also perform an industry analysis that
1 See Financial Times article “Should We End the Tax Deductibility of Business Inter-
est Payments?”. 22 July 2020. https://www.ft.com/content/426c1465-9561-4300-
8d3e-2430e4124c93.

Introduction
reveals how energy firms, banks, consumer services and the trans-
portation sector were the worst affected by the crisis. Dufour breaks
down these effects at the country level for the US and the UK and ob-
serves similar patterns. Banks are badly affected as loan defaults are
expected to rise and low interest rates compress banks’ profit mar-
gins. Regulatory restrictions on banks’ dividend payouts have put
further downward pressure on bank stocks. Energy firms and, par-
ticularly, oil companies have suffered from the largest contraction in
demand ever recorded. Kalyuzhnova and Lee explain that this, com-
bined with persistent excess supply, produced a ‘perfect storm’ for
the industry. Furthermore, demand may not go back to pre-pandem-
ic levels for some time. This may be caused by lower oil consumption
resulting from, among other factors, changes in people’s attitude to-
wards air travel and companies embracing more extensively work-
ing-from-home practices and virtual meetings instead of international
corporate travels. An obvious casualty of travel restrictions follow-
ing COVID-19 lockdowns worldwide is tourism. Palmer considers the
short-term and long-term consequences of the pandemic on consum-
er behaviour. He argues that lifting restrictions will not automatically
reset the clock back to pre-pandemic times. The lockdowns are likely
to make tourists more prudent when planning their holidays, at least
in the short term. But in the long run the sector is likely to recover
thanks to its capacity to reinvent itself as it did repeatedly in the past.
Travel restrictions have also had profound consequences for the
real estate sector. In addition, Mattarocci and Roberti argue that
the residential and commercial real estate markets in Europe were
also impacted by site-visit limitations, the lower disposable income
of householders and falling revenues of commercial tenants. The au-
thors suggest that householders may seek bigger dwellings in the fu-
ture to be able to work from home more comfortably. The preferred
relocation areas for households and offices could be outside city cen-
tres because of their greater affordability and their lower infection
risk as they are less densely populated.
The insurance industry was also affected by the current pandem-
ic. However, Ioannides explains that insurers and reinsurers are well
capitalised to absorb the shock of this crisis, even though their loss-
es so far have been substantial at US $200 billion. Sutcliffe argues
that the increased elderly mortality rates because of COVID-19 may
benefit life insurers and defined benefit pension funds, but only in
the short run unless there are further and extensive infection waves.
He concludes that those who moved out of their defined benefit pen-
sions or cashed in their defined contribution pensions during the pan-
demic, when asset prices were depressed, are losers from this crisis.
An obvious question for institutional investors and individuals is
how to structure an investment portfolio in such a way that makes it
resilient to pandemic risk. González, Jareño and Skinner explore this
Introduction
question by investigating the risk reduction that may result by di-

versifying portfolios into cryptocurrencies. They conclude that some
cryptocurrencies (Ethereum and Bfinance) have the potential to con-
trol risk, while others (Bitcoin, Litecoin and Tezos) are less effective
in this respect. However, risk reduction comes at the cost of lower
risk adjusted returns.
Social distancing has limited our ability to see family and friends
and also to participate in leisure activities. Football fans across Eu-
rope have been prevented from attending live matches and the foot-
ball industry has suffered financially as a result. Reade and Singleton
point out that football’s decision makers should rethink the alloca-
tion of resources within the industry to help it recover. Greater in-
vestment in women football, a small role for agents and perhaps state
intervention could all contribute to resolving football’s current and
more long-standing issues.
Borri takes a close look at Italy, the first country to witness high
infection rates in Europe. From a careful analysis of the measures
taken in the country, which varied across cities and regions, he con-
cludes that the Italian experience can be a useful case study for pol-
icy makers to assess the costs and benefits associated with different
approaches to tackling future waves. Donadelli, Gufler and Castellini
argue that COVID-19 containment measures were introduced with
delay and were badly communicated by the Italian government. The
resulting uncertainty had the strongest effect on the construction,
education, manufacturing and hospitality sectors and may slow down
their recovery phase.
Arundale and Mason examine the coronavirus crisis from the
perspective of private equity (PE) and venture capital firms. Their
assessment is that the inevitable short-term contraction in this in-
dustry’s activity is likely to revert to pre-pandemic levels in the not-
so-distant future. The undervaluation of public companies may gener-
ate good opportunities for PE firms. However, start-ups may struggle
to find funding in the current economic environment unless govern-
ments support their growth. Antypas predicts that PEs as well as
hedge funds will be big players in the mergers and acquisitions mar-
ket over the next few months. Before the pandemic, these firms had
accumulated a lot of ‘dry powder’, that is capital available for invest-
ments. Furthermore, their long-term investment horizon makes them
particularly attractive to distressed firms.
The drastic reduction in air travel and road congestion in cities
around the world has undoubtedly had a positive impact on the en-
vironment with lower levels of pollution and CO2 emissions. Battis-
ton, Billio and Monasterolo review the fiscal and monetary policies in
Europe and challenge their short-term objective of taking the econ-
omy back to ‘business as usual’. Instead, the authors suggest that
the adoption of longer term objectives aiming to an alignment with
Introduction
the EU Green Deal and the EU corporate taxation policies would be

more beneficial and as cost-effective. Indeed, the European Central
Bank has recently taken a pro-environmental stance that is in line
with the authors’ proposed policy response.2 Bardsley also propos-
es that central banks should support an environmentally friendly re-
covery. But, he points out that this should not be done through bond
purchases in the secondary market, which are “regressive and stra-
tegically blind”. Instead, he favours an open monetisation of public
sector borrowing and discusses different ways in which this could
be implemented.
Unemployment has risen dramatically during the pandemic. Raz-
zu examines the pandemic consequences for the labour market in
the UK with a focus on gender inequality. His analysis of recent
studies and the data available so far reveals that unemployment has
increased more for low paid jobs and in sectors such as retail, ac-
commodation and food services where women are more likely to be
over-represented. He also finds that, because of school closures,
women are more likely than men to devote additional time to child-
care and household work, which may have a substantial impact on
their career prospects. The gender pay gap may also have increased
during the current crisis and the government’s suspension of the
requirement for large firms to publish the gender pay differentials
among their employees has not helped bring more equality to the
UK labour market.
A form of labour market inequality that has had a dramatic impact
in India concerns seasonal workers. Daripa reports that 120 million
villagers were made unemployed overnight when the Indian govern-
ment sanctioned a total lockdown on March 24, 2020. These work-
ers were left without any support and 9 weeks after the lockdown the
vast majority of them could still not benefit from government spon-
sored food rations under India’s Public Distribution System. The au-
thor argues that the lack of political representation of these work-
ers has left their voice unheard when it comes to government policy.
Mouritzen, Rezaei and Liu focus on how the coronavirus influenced
the flow of international talent and specifically examine the experi-
ence of European researchers in China. Cross-country mobility of
researchers can increase scientific productivity with ultimate ben-
efits for the economy. The authors show preliminary evidence that
a large proportion of European researchers that were based in Chi-
na before the pandemic has now left the country and is not planning
to return or is uncertain about that possibility, which is a concern.
2 See “Lagarde Puts Green Policy Top of Agenda in ECB Bond Buying”. The Finan-
cial Times, 8 July 2020. https://www.ft.com/content/f776ea60-2b84-4b72-9765-
2c084bff6e32.

Introduction
COVID-19 has also accelerated the adoption of digital technolo-

gy and artificial intelligence (AI) in the corporate world. Pasha ex-
plores what this means in terms of the skillset that employees need
to develop to thrive in the new working environment. Adaptability
emerges as a key quality for personal success. Liu and Guo further
analyse the business transformation that AI, big data and data ana-
lytics are producing in the business world. They also discuss ethical
and cybersecurity implications. Finally, Chen looks at how alterna-
tive data sources can be used to support decision-making especially
in critical times like those faced during the current pandemic. There-
fore, unlocking the potential of new data sources can be key to mak-
ing our society better equipped to face future crises.

Part 1
Historical Perspective
21
The Global Financial Crisis

and the COVID-19 Pandemic
Antonio Moreno
Universidad de Navarra, España
Steven Ongena
University of Zurich, Switzerland; Swiss Finance Institute; KU Leuven and CEPR
Alexia Ventula Veghazy

European Central Bank
Alexander F. Wagner
University of Zurich, Switzerland; Swiss Finance Institute; European Corporate Governance
Institute; CEPR
Abstract We sketch possible linkages between features of the 2008-2009 financial

crisis and outcomes of the 2020 COVID-19 pandemic. We start from three features of the
financial crisis, i.e. (1) costly bank bailouts, (2) constrained SME credit, and (3) strict bank
regulation. We then discuss their intermediate outcomes in terms of: (1) sovereign debt
accumulation and possible cuts in public health spending, (2) the slowing of economic
growth and labour mobility; and (3) bank zombie lending, to arrive at the COVID-19 pan-
demic severity in terms of infection and death rates and the difficulties in designing and
implementing economic support policies.
Keywords Financial crisis. COVID-19 pandemic. Bank default. Local credit. Zombie lending.
Summary 1 Costly Bank Bailouts. – 2 Constrained SME Credit. – 3 Strict Bank

Regulation. – 4 Testing Strategy: Preliminary Exploration.
We aim to sketch possible linkages between features of the 2008-09 finan-

cial crisis and outcomes of the 2020 COVID-19 pandemic. We do not aspire
to theoretically and/or empirically establish such links in this chapter, but
rather seek to point out a few possible channels. Our hope is that future re-
Innovation in Business, Economics & Finance 1

ISBN [ebook] 978-88-6969-442-4
Open access 23
Published 2020-07-31
© 2020 Creative Commons Attribution 4.0 International Public License
DOI 10.30687/978-88-6969-442-4/001
Antonio Moreno, Steven Ongena, Alexia Ventula Veghazy, Alexander F. Wagner
search (including our own, i.e. we are pursuing cross-country and

within-country testing) can reject or confirm some of the conjectures
regarding the impact of the 2008-09 financial crisis on the unfold-
ing health and economic outcomes of the 2020 COVID-19 pandemic.
Empirical testing for sure can occur comparing countries, but also
across localities, banks, and firms.
We will focus on three features of the financial crisis, i.e. bank
bailouts that were often costly, SME credit which became more con-
strained, and bank regulation that became stricter. We will then dis-
cuss their intermediate outcomes in terms of the accumulation of
sovereign debt and possible cuts in public health spending, the slow-
ing of economic growth and labour mobility, and bank zombie lend-
ing, to arrive at the COVID-19 pandemic severity in terms of infec-
tion and death rates and difficulties in designing and implementing
economic support policies.
Figure 1 below provides a small roadmap to the rest of the discussion.
2008-2009 Global Financial Crisis

Costly bank bailouts Constrained SME credit Stricter bank regulation
Sovereign debt Lack of local economic Bank zombie lending

accumulation growth
Funding cuts in public Young employees cannot or Many zombie firms clog
health sector and do not leave parental home product markets
crowding at retiree homes or town
Higher COVID-19 infection and death rates Difficulty designing and

implementing economic
support policies
2020 COVID-19 Pandemic
Figure
Figure 1 links elements of the 1 The channels
financial crisis through which the through
in 2008-2009, Global Financial
theirCrisis
impactaffected
on
public health and economic outcomes since then, on characteristicsthe COVID-19ofPandemic Outcomes
the COVID-19
pandemic in 2020. Financial elements are in red, public health elements are in blue, and
economic elements are in green.
Figure 1 links elements of the financial crisis in 2008-09, through
their impact
The rest on public
of the paper health
proceeds andSection
as follows. economic outcomes
I discusses the costlysince then,
bank bailouts,
on characteristics of the COVID-19 pandemic in 2020. Financial el-
ements
Section II are in red, public
the constrained health
SME credit, elements
and Section III theare
strictin blue,
bank and econom-
regulation. Section IV
ic elements are in green.
concludes by discussing a few possible empirical testing strategies and offers preliminary
The rest of the paper proceeds as follows. Section I discusses the
costly
findings.bank bailouts, Section II the constrained SME credit, and Sec-
tion III the strict bank regulation. Section IV concludes by discuss-
ing a few possible empirical testing strategies and offers prelimi-
nary findings. I. Costly Bank Bailouts
Bank bailouts are complex phenomena. 1 In Berger, Nistor, Ongena and Tsyplakov (2020)
we note that bank bailouts are not the “one-shot” Aevents
New World Post COVID-19, 23 -34
commonly described in the
literature. Bank bailouts are instead dynamic processes in which regulators “catch”
financially distressed banks; “restrict” their activities over time; and “release” the banks
1 Costly Bank Bailouts
Bank bailouts are complex phenomena.1 In Berger, Nistor, Ongena

and Tsyplakov (2020) we note that bank bailouts are not the ‘one-shot’
events commonly described in the literature. Bank bailouts are in-
stead dynamic processes in which regulators ‘catch’ financially dis-
tressed banks; ‘restrict’ their activities over time; and ‘release’ the
banks from restrictions at sufficiently healthy capital ratios. Even
more important than their complexity is their potential cost to the
taxpayers. Both capital injections and debt guarantee bailouts led
to governmental outlays that resulted in further governmental debt
buildups in many countries in Europe. While it is true that the picture
is dynamic and complex, as a significant portion of the capital injec-
tions were later recouped and most debt guarantees never led to any
claims, the UK government for example probably ‘borrowed’ around
£150 billion (and was exposed for ten times that amount) according
to its own National Audit Office.2 This amount represented around
10% of general government gross debt (which stood at £1,821.3 bil-
lion at the end of the financial year ending March 2019, equivalent to
85.2% of gross domestic product). As a matter of relevant compari-
son, that £150 billion is higher than the yearly budget of the Nation-
al Health Service (NHS) by a dozen or so billions.3
The linkage from one government budget item to another one is
never straightforward, as demands are many and money is fungible.
At the same time also in the case of the NHS it is hard to overlook an
actual decrease in its budget in 2009 after 50 years of year-on-year
growth and the slower growth thereafter.
In any case, the financial crisis led to costly bailouts, not only in-
creasing sovereign debt but also putting pressure on other govern-
mental spending, including those in the public health space, making
dealing with any pandemic more challenging. Think about the impact
of lower funding prior to 2020 on the functioning or even existence
of pandemic coordination units, the number of hospital beds includ-
ing intensive care units, staff and their specialisation, etc. However,
1 Berger and Roman (2020) provide an excellent kaleidoscopic review of bank bail-
outs as these occurred around the world.
2 On December 15, 2010 in its Second Report on the financial crisis, the National Au-
dit Office reported that the “scale of the support currently provided to the banks has
fallen from its peak of £955 billion to £512 billion as at 1 December 2010. However, the
amount of cash currently borrowed by the Government to support UK banks has risen
by £7 billion since December 2009 to a total of £124 billion” (https://www.nao.org.
uk/report/maintaining-the-financial-stability-of-uk-banks-update-on-the-
support-schemes/).
3 See for example the websites of the Institute for Fiscal Studies and the UK Econom-
ic and Social Research Council on Health Spending: https://www.ifs.org.uk/tools_
and_resources/fiscal_facts/public_spending_survey/health_spending.

A New World Post COVID-19, 23 -34
not only hospital care but also elderly care may have been affected,
leading to lower quality care for the elderly in more packed facilities,
attended by fewer quality staff with fewer medical on-site facilities
again making the pandemic outcomes potentially worse.
In addition, the further build-up of governmental debt due to the
bailouts may have made it more difficult to set up very large and/or
the appropriate economic assistance packages when needed (due to
an actual or implied government budget constraint).4
2 Constrained SME Credit
The financial crisis led to a worsening of access to credit for house-

holds and corporations alike. Especially SMEs in periphery countries
(such as Greece, Ireland, Italy, Portugal and Spain) were negative-
ly affected. Banks, for example, ended up closing branches in those
countries, which in Bonfim, Nogueira and Ongena (2020) we show to
involve losses for (small) firms locally.
A lack of local credit access led to increasing local unemployment
and worse economic conditions. Take Spain. With a real estate boom
underway, once past the mandatory school age, many youngsters had
directly entered the labour force to work in the well-paying real estate
construction sector. Once the crisis hit, these youngsters found them-
selves quickly out of jobs and out of money, but strong family networks
kept them off the street by bringing them back to live with their par-
ents or other older relatives. And later, after a few years, when condi-
tions in Spain improved, this lost generation may have found it chal-
lenging to find a job far away from their home town, maybe also not
wanting to move too far away from their now aged parents or relatives.
Overall, the financial crisis may have made living at home or in
the hometown for 20-to-30-year olds in countries like Spain and Italy
(which was already prevalent) more common. In addition, this living-
in-close-proximity of older and younger people due to the financial
crisis may have made COVID-19 infections more likely and deadly as
younger people often carry the virus asymptomatically while espe-
cially older adults seem more likely to succumb to it.
4 In Andrieș, Ongena and Sprincean (2020) we assess the impact of the pandemic in
Europe on sovereign CDS spreads using an event study methodology. We show that a
higher number of cases and deaths and public health containment responses during
the pandemic significantly increase the uncertainty among investors in European gov-
ernment bonds.

3 Strict Bank Regulation
Finally, higher capital requirements and loan loss provisioning in-

troduced after the financial crisis may have led banks to wait long-
er to recognise potential loan losses. In Bonfim, Cerqueiro, Degryse
and Ongena (2020), for example, we argue how in spite of growing
regulatory pressure applied in the opposite direction in most devel-
oped economies, ‘zombie lending’ remains a widespread practice
by banks (see also Acharya et al. 2019). We then exploit a series of
large-scale on-site inspections made on the credit portfolios of sev-
eral Portuguese banks to show how these inspections affect banks’
future lending decisions making an inspected bank 20% less likely
to refinance zombie firms, immediately spurring their default. Over-
all, we document that banks seemingly reduce zombie lending be-
cause the incentives to hold these loans disappear only once they are
forced to recognise losses.
This forced recognition of losses, and in general, the willingness by
supervisors to force banks to recognise and restructure, may matter a
great deal, both for subsequent economic growth and also for the pos-
sibilities for an optimal pandemic economic policy response. In Gropp,
Ongena, Saadi and Rocholl (2020), for example, we show that during
the recent crisis in the US regions with higher levels of supervisory
forbearance on distressed banks, there was less restructuring in the
real sector: fewer establishments, firms, and jobs were lost if more
distressed banks remained in business. We find that in these regions
the banking sector is less healthy for several years after the crisis,
manifested in lower capital, and higher non-performing assets ratios.
But consistent with the cleansing hypothesis, regions with less super-
visory forbearance during the crisis experienced a better productiv-
ity growth path after the crisis with more establishment entries, job
creation, and employment, wages, patents, and output growth. There-
fore, it seems to be a matter of short-term gain, long-term pain, with
both zombie firms and zombie banks depressing economic activity for
a long time after a financial crisis has been unspooling.
If zombie firms (and zombie banks) are so difficult to get rid of,
their presence for sure also makes the implementation of government
lending programmes to help firms through the early and mid-stages
of the pandemic compromised from the very start. This is because
money ends up in the ‘wrong hands’ and banks are all too happy to
have a deep-pocketed co-underwriter, i.e. the government, of the set
of zombie firms they have continued to service.

4 Testing Strategy: Preliminary Exploration
There are several levels at which the impact of the financial crisis on
the unfolding of the COVID-19 pandemic can be assessed. At the coun-
try level, correlations can be assessed of the measures of the severity
of the financial crisis in terms of the loss in output growth, increase in
sovereign debt or subsequent build-down in the public health sector
and the (pre-lockdown) severity of the pandemic in terms of infections
and death rates. At the local level, in Spain for example, one can assess
how measures of changes in health care expenditures (after minus be-
fore the financial crisis) are related to financial crisis measures. In ad-
dition, we can study how measures of changes in living in close prox-
imity (after versus before the crisis) are predicted by financial crisis
measures. Based on these assessments, one can then see how predict-
ed values of these two sets explain the COVID-19 pandemic measures,
controlling for the level of healthcare and the level of living in proximity.
We present here some preliminary analysis for the Spanish case,
which provides motivation for further formal work (which we pur-
sue ourselves). We focus first on the relation between foreclosures,
which capture the severity of the financial crisis across provinces, and
changes in public health expenditures. Using data from the Spanish
Property Registrar, we identify the number of per-capita foreclosures
across the 50 provinces (‘Provincias’) in 2012.5 That year is the second
trough of the Spanish double dip recession and is associated with the
deepest phase of the sovereign debt crisis, which ended in an impor-
tant bailout for Spanish banks. Public bailouts in Spain reached 60 bil-
lion EUR, around 6% of GDP. We correlate three foreclosure measures
with the percent changes in per-capita public health expenditures
across provinces relative to 2009, the year with highest per-capita
public health expenditure prior to crisis-driven cuts. Data for health
care expenditures were collected from the Spanish Health Ministry
at the regional level.6 This expenditure data from the 17 regions (‘Co-
munidades Autónomas’) was then distributed across provinces pro-
portionately to the province population. The average province drop
in public health expenditures relative to 2009 was 8%, 12%, 12% and
6% in 2012, 2013, 2014 and 2015, respectively. Table 1 shows the re-
sults for three measures: foreclosure initiatives, materialised foreclo-
sures, and settlements between the household and the bank aimed to
give back the property with no further payments (‘dación en pago’).
5 Foreclosures data from the Property Registrar was downloaded from: https://
www.registradores.org/actualidad/portal-estadistico-registral/estadisti-
cas-de-propiedad.
6 Public health expenditures was obtained from: https://www.mscbs.gob.es/esta-
dEstudios/estadisticas/sisInfSanSNS/pdf/egspGastoReal.pdf.

Table 1 Correlations between per-capita foreclosure measures per province in 2012

and changes in per-capita health expenditures per province with respect to 2009
Initiations Foreclosure Settlements

of foreclosures procedures between
procedures materialized household and bank
2013-2009 -0.32** -0.30** -0.30**
2014-2009 -0.30** -0.26** -0.29**
2015-2009 -0.26* -0.24* -0.19
2016-2009 -0.25* -0.24* -0.22
2017-2009 -0.18 -0.19 -0.15
2018-2009 -0.13 -0.15 -0.12
Measures of foreclosures are: initiations of foreclosures procedures, foreclosure

procedures materialized, and settlements between household and bank to give back the
property with no further payments. One and two stars imply statistical significance
at the 10% and 5% confidence levels, respectively.
Results in table 1 suggest that provinces with a higher intensity of

foreclosures due to the financial crisis experienced significantly neg-
ative changes in health care expenditures in 2013, 2014, 2015 and
2016. There may be a number of mechanisms at work behind these
correlations, such as the need to shift public expenditures to other
items, such as unemployment benefits. Additionally, lower tax col-
lection during those years, the need to reduce fiscal deficits during
those years and an overall higher fiscal burden seem to have taken a
toll precisely in provinces heavily hit by the financial crisis. We also
note that these negative correlations are pervasive throughout the
sample, including the latest year, 2018, though their size and statis-
tical significance naturally decrease over time.
The severity of the Spanish financial crisis had a relevant impact
in terms of the unemployment rate, which reached 26% in 2013. The
real estate bubble of the 1990s and 2000’s burst in 2009, when con-
struction abruptly came to a halt and many young low-skilled work-
ers were laid off. Unemployment was particularly high among young
workers, reaching above 50% of active young population. The re-
sponse of these workers came in different forms. While some moved
to other countries, returning home was definitely an option for many
of them. If, consequently, household sizes increase and older children
are staying in the same home, this could have had an impact in the
transmission of the COVID-19.
To assess the relation between the Spanish financial crisis and
the potential changing patterns of co-residence in Spanish house-
holds, we retrieve yearly province-level census data from IPUMS
from 2009 to 2018: family size, age of the eldest child, and the age
spread between the eldest and youngest child. We then correlate
changes in these co-residence measures – also with 2009 being the

base year – and the 2012 foreclosure measures.
Table 2 shows the results. Strikingly, each correlation in the ta-
ble starting in 2014 is positive, implying that households in provinces
that were harder-hit by the financial crisis, experienced either high-
er growth or a lower decrease in the household size in the following
years. Not all correlations are significant. Interestingly, significance
is generally higher for later years, indicating that perhaps there is
a lag by which the co-residence effects are borne out. The strongest
results are obtained for the age of the eldest child. While with these
data it is not possible to distinguish whether these descendants re-
turn home after being laid off or stay at home after the financial cri-
sis, both channels are consistent with our results and could potential-
ly contribute to an increased likelihood of disease contagion during
the pandemic. Overall, the findings are consistent with the hypoth-
esis stated above, at least at the unconditional level (i.e. not control-
ling for other relevant factors).
Table 2 Correlations between per-capita foreclosure measures per province

in 2012 and changes in co-residence census measures across households
Foreclosure measure Family size Age eldest child Age spread children
2013-2009 initiations -0.21 -0.09 -0.15
materializations 0.15 0.10 0.03
settlements -0.05 0.02 -0.08
2014-2009 initiations 0.14 0.15 0.14
settlements 0.25* 0.28** 0.24*
2015-2009 initiations 0.34*** 0.39*** 0.25*
settlements 0.21 0.15 0.14
2016-2009 initiations 0.20 0.28** 0.23*
materializations 0.29** 0.34*** 0.25*
settlements 0.15 0.23 0.20
2017-2009 initiations 0.09 0.17 0.18
materializations 0.27** 0.21 0.20
settlements 0.18 0.25* 0.21
2018-2009 initiations 0.18 0.24* 0.16
materializations 0.28** 0.24* 0.24*
settlements 0.22 0.29** 0.18
Measures of foreclosures are: initiations of foreclosures procedures, foreclosure

procedures materialised, and settlements between household and bank to give back
the property with no further payments. Measures of co-residence are: changes in
family size, changes in the age of the eldest child at home, and changes in the age
spread between the eldest and youngest child. One, two and three stars imply
statistical significance at the 10%, 5% and 1% confidence levels, respectively.

As a third descriptive exercise, we explore the relation between the

financial crisis and the use of nursing homes for the elderly, com-
monly known in Spain as elderly residences. Elderly residences have
been at the centre of the COVID-19 impact in Spain. In particular,
and while official data are not available at the time of the writing of
the article, it is widely believed that more than half of the deceased
died in elderly residences.7 We measure the usage intensity of el-
derly residences with two different ratios provided by the IMSERSO
(Spanish Institute for Elderly and Social Services) in 2018, the lat-
est year available.8 The first one is the ratio between users of elder-
ly residences in a given province and the province population. The
second one is the ratio of users of elderly residences in a given prov-
ince and their total capacity. The residences considered here are on-
ly those under public funding.
Table 3 shows the correlations between the two residence ratios
and the changes in public expenditures in health services with re-
spect to 2009. The correlations are negative in most cases, implying
that provinces that reduced their per capita public health expendi-
tures by a larger amount were also those with a more intensive us-
age of the elderly residences under public funding in 2018. These
correlations become larger and more significant for the 2014-2009
year interval. Thus, provinces with more crowded elderly residenc-
es were also the ones that experienced more serious public health
expenditure cuts. This finding points at potential trouble for these
provinces in the wake of the COVID-19 pandemic, as their response
may be hindered by both overcrowded residences and less public
health resources.
7 See, for instance, the June 6th, 2020 newspaper interview with the President of the
Elderly Residence Association in Spain: https://www.elmundo.es/espana/2020/06/0
7/5edbeec9fdddff5e298b457f.html.
8 See https://www.imserso.es/imserso_01/documentacion/estadisticas/ssppmm_
esp/index.htm.

Table 3 Correlations between elderly residence ratios of intensive usage in 2018

and changes in per-capita health expenditures per province with respect to 2009
Residence users divided Residence users divided

by province population by residence positions
in the province
2013-2009 0.08 0.06
2014-2009 -0.33** -0.33**
2015-2009 -0.02 -0.13
2016-2009 -0.14 -0.25*
2017-2009 -0.12 -0.19
2018-2009 -0.13 -0.16
Measures of residence ratios are: residence users divided by province population,

and residence users divided by residence positions in the province. The residences
considered are those under public funding. One and two stars imply statistical
significance at the 10% and 5% confidence levels, respectively.
In future work, we aim to test more formally the links among the four
dimensions considered in this chapter: severity of the financial crisis,
changes in health expenditures, changes in household co-residence
and overcrowding of elderly residences. The preliminary results pre-
sented here at least suggest the possibility that provinces more af-
fected by the financial crisis suffered higher public health expendi-
ture cuts, a higher increase in household co-residence as a response
to the crisis as well as more crowded elderly residences ex-post. This
combination of factors might have exacerbated the consequences of
COVID-19 in these provinces.
Overall the main question that will need to be addressed is “How
to better manage systemic risks – from cyber attacks and pandem-
ics to financial crises and climate change – in a globalized world”
(Goldin, Mariathasan 2014). Fighting the fires of one realisation of
such a global systemic risk, i.e. the financial crisis, may have lead
to consequences for how another realisation one decade later, i.e.
the COVID-19 pandemic, is having its impact and is being handled.
The whole picture calls for more creative thinking, acting and re-
source allocation at all levels and by all agents (government, house-
holds and firms) to enhance system resiliency, in accordance with
the costs and benefits involved. But in the end, and not simplifying
too much, global systemic risks likely also call for a sure-footed glob-
al ‘systemic’ approach.

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ing Crises. Halle: IHW.

What Can the Black Death Tell

Us About the Global Economic
Consequences of a Pandemic?
Adrian R. Bell
Henley Business School, University of Reading, UK
Helen Lacey
University of Oxford, UK
Andrew Prescott
University of Glasgow, UK
Abstract The COVID-19 pandemic and global lockdown have led to academics and me-
dia outlets looking for historical parallels to draw lessons from. Whilst great care needs to
be taken when trying to relate events many centuries apart, this chapter reviews the Black
Death (1348-1351) and particularly focuses upon its economic impact on England. We will
contextualise the pandemic and illustrate both the immediate and longer term outcomes
of this devastating event. Whilst we can direct the reader to implications for our current
situation, we will also discuss the many differences of these two global events.
Keywords Pandemic. Black Death. Economic History. Recovery.
Summary 1 The Economic Shock of Pandemics. – 2 ‘Anger, Antagonism, Creativity’.

– 3 Lessons for Today.

ISBN [ebook] 978-88-6969-442-4
Open access 35
DOI 10.30687/978-88-6969-442-4/002
Adrian R. Bell, Helen Lacey, Andrew Prescott
What Can the Black Death Tell Us About the Global Economic Consequences of a Pandemic?
1 The Economic Shock of Pandemics
Concerns over the spread of the novel coronavirus in March 2020

translated into an immediate economic slowdown. Stock markets
were hit: the UK’s FTSE 100 seeing its worst days of trading for
many years (This is Money 2020)1 and additionally the Dow Jones
and S&P500 in the US. Money had to go somewhere and the price of
gold – seen as a stable commodity during extreme events – reached
a seven-year high.2
The real economic impacts became more evident as globally we
saw a country by country lockdown of normal activities. In the UK
this translated into a Government bailout of a scale never previously
seen or imagined.3 Soon economists were predicting a ‘Greatest re-
cession’, as governments struggled with their exit plans and attempt-
ing to reconcile levels of debt never seen in peacetime, alongside the
prospect of mass unemployment – perhaps at levels that would take
economies back to the 1980s (or worse).4
Whilst it was perhaps immediately clear (to economic commenta-
tors rather than governments) that the COVID-19 pandemic and as-
sociated lockdowns were going to have a long term downwards effect
on the world economy, it became more and more tricky to link events
to historical pandemics. The main differentiating factor is the ability
of current governments to lockdown their citizens for long periods
of time, a feat that would have been beyond the means of medieval
rulers (who, in any case, would have had fewer qualms about send-
ing out the labourers to work during a pandemic).
So whilst acknowledging the challenges, a look back at history can
help us consider the economic effects of public health emergencies
and how best to manage them. In doing so, however, it is important
to remember that past pandemics were far more deadly than coro-
navirus, which has a relatively low death rate (Parker 2020). With-
out modern medicine and institutions like the World Health Organ-
ization, past populations were more vulnerable. It is estimated that
This is an expanded version of an original article in the Conversation by the same au-
thors (Bell, Lacey, Prescott 2020).
We would like to thank the editors of this volume for helpful comments and also An-
nabel Bligh for originally encouraging and commissioning the article for the Conver-
sation (https://theconversation.com/what-can-the-black-death-tell-us-about-
the-global-economic-consequences-of-a-pandemic-132793).
1 https://www.thisismoney.co.uk/wmoney/markets/article-8055045/FTSE-LIVE-
Shares-deep-red-market-panic-continues.html.
2 https://www.bbc.co.uk/news/business-51612520.
3 https://www.henley.ac.uk/news/2020/when-is-a-bailout-not-a-bailout.
4 https://www.project-syndicate.org/commentary/coronavirus-greater-
great-depression-by-nouriel-roubini-2020-03.

the Justinian plague of 541 AD killed 25 million and the Spanish flu
of 1918 around 50 million.5
By far the worst death rate in history was inflicted by the Black
Death. Caused by several forms of bubonic plague, it lasted from
1346 to 1353, killing anywhere between 75 million and 200 million
people worldwide and perhaps one half of the population of England
(Benedictow 2005). As we will describe, the economic consequenc-
es were also profound.
2 ‘Anger, Antagonism, Creativity’
It might sound counter-factual – and this should not minimise the con-

temporary psychological and emotional turmoil caused by the Black
Death – but the majority of those who survived went on to enjoy im-
proved standards of living. Prior to the Black Death, England had suf-
fered from severe overpopulation.
Following the pandemic, the shortage of manpower led to a rise in
the daily wages of labourers, as they were able to market themselves
to the highest bidder. The diets of labourers also improved and includ-
ed more meat, fresh fish, white bread and ale (Dyer 1989, 158-60).
Although landlords struggled to find tenants for their lands, chang-
es in forms of tenure improved estate incomes and reduced their de-
mands. But the period after the Black Death was also, according to
economic historian Christopher Dyer (2005, 429), a time of “agita-
tion, excitement, anger, antagonism and creativity”.
Across Europe, the reaction of many governments was to try to
hold back the tide of supply-and-demand economics (Cohn 2007). In
France, King John II passed detailed regulations for northern France
controlling work practices, wages and prices. Similar regulations had
been enacted in southern France in 1348. In Spain, legislation in Cas-
tile stipulated that lords could specify the place and time of work of
rural labourers, while in Aragon, work was made obligatory for all
except the ill, the old and children under 12. Italian city states also
attempted to control wages and prices. The most well-known labour
legislation is however the various ordinances and statutes passed by
the English government from 1349.
The ‘problem of labour’ became a preoccupation of English parlia-
ments and governments. Between 1349 and 1430, one third of the 77
parliaments which met passed legislation attempting to control wag-
es, terms of service and prices (Given-Wilson 2000, 85). An initial Or-
dinance of Labourers in 1349 specified that every man or woman, free
or unfree, aged sixty years or younger without income from land or
5 https://www.rwjf.org/en/blog/2013/12/the_five_deadliesto.html.

trade must work for whoever required their labour. Wages were set at
the levels that had been customary in 1346 and anyone receiving ex-
cessive wages forfeited the excess sum to the king. Victuallers were
also obliged to sell their wares for ‘reasonable’ prices (Poos 1983, 29).
These provisions were elaborated and enshrined in statute in
1351.6 The 1351 Statute of Labourers incorporated a table of set
wage rates for specific occupations. It stipulated that servants were
obliged to serve for entire years, and not by the day (Poos 1983, 30).
Subsequent legislation expanded and refined the national pay scales,
with even pay rates for stipendiary chaplains being controlled in
1362. Enforcement was also progressively tightened. In 1361, mone-
tary fines for breaches of labour legislation were replaced by brand-
ing of the letter F for Falsity on the forehead (although there is no ev-
idence this punishment was ever inflicted [Cohn 2007, 476]). A 1388
statute required letters of authorisation for any worker travelling
away from home (Bennett 2010, 12).
This was the first time an English government had attempted to
micromanage the economy. However, the aim of the government in
the 14th century was not to promote economic growth but rather to
maintain the existing social order. In a world where social ranks were
seen as God-given, governments thought there was a moral impera-
tive to restrict excessive consumption or accumulation of wealth by
those classes not entitled to it. These concerns also led to sumptua-
ry legislation which for example specified which social groups could
wear what type of clothes with poorer people “allowed to wear only
blanket and russet wool” (Sponsier 1992, 275). Legislation such as
this sought to preserve society as it was before the pandemic – just
as furloughing sought to deep freeze the economy in 2020, only the
medieval legislation was not temporary.
But this attempt to regulate the market did not work. Enforcement
of the labour legislation led to evasion and protests. In the longer
term, real wages rose as the population level stagnated with recurrent
outbreaks of the plague. Landlords struggled to come to terms with
the changes in the land market as a result of the loss in population.
There was large-scale migration after the Black Death as people took
advantage of opportunities to move to better land or pursue trade in
the towns. Most landlords were forced to offer more attractive deals
to ensure tenants farmed their lands. However, any suggestion that
women benefitted, even temporarily, from the situation through in-
creased job opportunities and incomes, seems to be a myth. Research
has shown that women lost out by accepting permanent contracts and
the perceived security they offered, despite the fact that casual work
was better remunerated (Humphries, Weisdorf 2015).
6 https://sourcebooks.fordham.edu/seth/statute-labourers.asp.

The failure of the government’s attempts to control the labour mar-

ket is vividly illustrated in legal records. In Surrey, William Cothull
found John Egger wandering and able to work. Cothull offered to em-
ploy Egger as a ploughman for a year. Egger refused, so Cothull had
Egger arrested and put in the stocks until he agreed to work for him
(Bennett 2010, 17). Others were more successful in evading the leg-
islation. A common trick was to claim that you already worked for
someone else: when Peter de Semere offered work to William atte
Merre of Merrow in February 1350, William claimed he was unable
to work for Peter because he was already a serf of the prior and con-
vent of St Mary at Boxgrove on the priory’s manor of Merrow, and
the justices found in William’s favour (Horrox 1994, 317). Others sim-
ply disappeared. John Carter a ‘common labourer’ took an oath be-
fore the constables of Apley in Lincolnshire in June 1373 to work in
that village the following summer and autumn but vanished a week
later (Poos 1983, 31).
The inequities of the labour legislation led to resistance. In 1350,
two constables in the village of Preston in Suffolk tried to force Rich-
ard Digg, a common labourer, to work for various men in the vil-
lage. The vicar objected and demanded to know by what authority
Digg could be ordered to work. The vicar excommunicated the con-
stables and, encouraged by the vicar, Digg refused to serve and in-
stead earned his own living as a wage labourer (Bennett 2010, 22-3).
The idea that labourers might not work according to the customary
patterns and could earn their own living as wage labourers offend-
ed many. Wage labourers were often portrayed as idle and feckless,
wasting their time in taverns and gaming (itself a sign that they had
more disposable income). William Langland in his great moral poem
Piers Plowman contrasted the honest virtuous figure of the plough-
man with the wage labourers who were portrayed as rootless wasters
unwilling to do an honest day’s work, akin to fraudulent beggars (Dy-
er 2000). These themes were taken up by the gentry and merchants
in parliament who complained about workers refusing to accept the
statutory levels of pay and leaving before the end of their service:
For fear of such flights, the commons now dare not challenge or
offend their servants, but give them whatever they wish to ask, in
spite of the statutes and ordinances to the contrary – and this chief-
ly through fear they will be received elsewhere. (Dobson 1981, 73)
A new middle class of men (almost always men) emerged. These were
people who were not born into the landed gentry but were able to
make enough surplus wealth to purchase plots of land. Clement Pas-
ton (of the Norfolk family who bequeathed the famous medieval letter
collection) took advantage of the Black Death to accumulate substan-
tial landholding in the vicinity of Paston. It is possible that Clem-
ent started life as a peasant bondsman, but he accumulated enough

wealth to have his son educated in the law and in two generations
the family rose rapidly through the ranks of the gentry.7 Recent re-
search has shown that property ownership opened up to market spec-
ulation (Bell, Brooks, Killick 2019a) and this market allowed inves-
tors to speculate and profit (Bell, Brooks, Killick 2019b).
Meanwhile, England was still at war with France and required
large armies for its campaigns overseas. This had to be paid for, and
in England led to more taxes on a diminished population. The par-
liament of a young Richard II came up with the innovative idea of
punitive poll taxes in 1377, 1379 and 1380, leading directly to social
unrest in the form of the Peasants’ Revolt of 1381.8 This revolt, the
largest ever seen in England, came as a direct consequence of the re-
curring outbreaks of plague and government attempts to tighten con-
trol over the economy and pursue its international ambitions. When
the rebels met the King at Mile End, they demanded that serfdom
should be abolished and that all land should be held at a rent of four
pence an acre. They also requested that the laws controlling when
and for whom men and women should work should be abolished and
that nobody should be forced to work against their will and without
a written agreement (Dobson 1981, 161).
3 Lessons for Today
While the plague that caused the Black Death was very different to
the COVID-19 pandemic, there are some important lessons here for
future economic growth. First, governments must take great care to
manage the economic fallout. Maintaining the status quo for vested
interests can spark unrest and political volatility. Second, restrict-
ing freedom of movement can cause a violent reaction. We have al-
ready seen the tensions around lockdown as a result of COVID-19.
At the time of writing, it is unclear how far further restrictions will
be necessary, but it is worth noting that there were five further out-
breaks of bubonic plague in Britain between 1360 and 1390 and these
recurrences, combined with resentment against the restrictions on
the labour market, contributed significantly to the tensions which
led to the revolt in 1381.
In the wake of the Black Death schemes for government borrow-
ing collapsed amidst accusations of corruption and misconduct. As
an alternative, Edward III prioritised overseas trade and implement-
7 https://www.oxforddnb.com/view/10.1093/ref:odnb/9780198614128.001.0001/
odnb-9780198614128-e-52791;jsessionid=99CFE47439CC7396B9551FEF55548ABB.
8 https://www.1381.online.

ed reforms to the wool markets (wool was England’s most import ex-
port in the period). The government broke up the old cartels that had
dominated the trade and these reforms were successful in generating
a level of profit that was unsurpassed for the rest of the Middle Ag-
es (Ormrod 2011, 369). As Boris Johnson conducts negotiations over
the Brexit deal he would do well to bear in mind the importance of
boosting overseas trade.
The pandemic of bubonic plague in the 14th century brought to
the fore anxieties about social change and inequality. Attempts by
the magnates and gentry over a period of decades to control these
changes led to large-scale social unrest. Today, the slow reaction of
governments to the disproportionate effects of the COVID-19 virus
on BAME populations has fostered the unprecedented international
protests by the Black Lives Matter movement following the killing of
George Floyd. The 14th-century experience reinforces the need for
government to act swiftly to address issues of social injustice at a
time when pandemics have heightened social and cultural anxieties.
Plus, we should not underestimate the knee-jerk, psychological re-
action. The Black Death saw an increase in xenophobic and antisemit-
ic attacks.9 It unleashed waves of persecution: against beggars and
priests in Narbonne, Carcassonne and Grasse; pilgrims in Catalonia;
Catalans in Sicily; and most infamously Jews across German-speak-
ing regions of Central Europe, through the Rhineland and thence into
Spain, France and the Low Countries (Cohn 2018, 48-53). In England,
resentment at the role of merchants from the Low Countries in the
wool trade led to xenophobic massacres of Flemings during the 1381
revolt. Fear and suspicion of non-natives changed trading patterns.
There will be winners and losers economically as the current pub-
lic health emergency plays out. In the context of the Black Death,
elites attempted to entrench their power, but population change in the
long term forced some rebalancing to the benefit of labourers, both
in terms of wages and mobility and in opening up the market for land
(the major source of wealth at the time) to new investors. Population
decline also encouraged immigration, albeit to take up low skilled or
low-paid jobs. All are lessons that reinforce the need for measured,
carefully researched responses from current governments.
9 https://www.nytimes.com/2009/09/01/health/01plague.html.

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Bell, A.R.; Brooks, C.; Killick, H. (2019a). “A Reappraisal of the Freehold Prop-
erty Market in Late Medieval England”. Continuity and Change, 34(3), 287-
313. http://doi.org/10.1017/S0268416019000316.
Bell, A.R.; Brooks, C.; Killick, H. (2019b). “Medieval Property Investors, ca. 1300-
1500”. Enterprise & Society, 20(3), 575-612. http://doi.org/10.1017/
eso.2018.92.
Bell, A.R.; Lacey, H.; Prescott, A. (2020). “What Can the Black Death Tell Us About
the Global Economic Consequences of a Pandemic?”. The Conversation, 3
March. https://bit.ly/31TfgGA.
Bennett, J.M. (2010). “Compulsory Service in Late Medieval England”. Past and
Present, 209(1), 7-51. http://doi.org/10.1093/pastj/gtq032.
Benedictow, O. (2005). “The Black Death: The Greatest Catastrophe Ever”. His-
tory Today, 55(3). https://www.historytoday.com/archive/black-
death-greatest-catastrophe-ever.
Cohn, Jr., S.K. (2007). “After the Black Death: Labour Legislation and Attitudes
Towards Labour in Late-Medieval Western Europe”. Economic History Review,
60(3), 457-85. http://doi.org/10.1111/j.1468-0289.2006.00368.x.
Cohn, Jr., S.K. (2018). Epidemics: Hate and Compassion from the Plague of Ath-
ens to AIDS. Oxford: Oxford University Press. http://doi.org/10.1093/
oso/9780198819660.001.0001.
Dobson, R.B. (ed.) (1981). The Peasants’ Revolt of 1381. 2nd ed. London: Macmillan.
Dyer, C. (1989). Standards of Living in the Later Middle Ages: Social Change in Eu-
rope c. 1200-1500. Cambridge: Cambridge University Press.
Dyer, C. (2000). “Work Ethics in the Fourteenth Century”. Bothwell, J.; Gold-
berg, P.J.P.; Ormrod, W.M. (eds), The Problem of Labour in Fourteenth-Cen-
tury England. York: York Medieval Press, 21-42.
Dyer, C. (2005). “Villeins, Bondmen, Neifs, and Serfs: New Serfdom in England,
c. 1200-1600”. Freedman P.; Bourin, M. (eds), Forms of Servitude in Northern
and Central Europe: Decline, Resistance, and Expansion. Turnhout: Brepols
Publishers, 419-36. https://doi.org/10.1484/M.TCNE-EB.3.4153.
Given-Wilson, C. (2000). “The Problem of Labour in the Context of English Gov-
ernment c. 1350-1450”. Bothwell, J.; Goldberg, P.J.P.; Ormrod, W.M. (eds),
The Problem of Labour in Fourteenth-Century England. York: York Medie-
val Press, 85-100.
Horrox, R. (1994). The Black Death. Manchester: Manchester University Press.
Humphries, J.; Weisdorf, J. (2015). “The Wages of Women in England, 1260-
1850”. The Journal of Economic History, 75(2), 405-47. https://doi.
org/10.1017/S0022050715000662.
Ormrod, W.M (2011). Edward III. New Haven (CT): Yale University Press.
Parker, E. (2020). “Coronavirus Outbreak: A New Mapping Tool that Lets You
Scroll Through Timeline”. The Conversation, 11 February. https://the-
conversation.com/coronavirus-outbreak-a-new-mapping-
tool-that-lets-you-scroll-through-timeline-131422.
Poos, L.R. (1983). “The Social Context of Statute of Labourers Enforcement”.
Law and History Review, 1(1), 27-52. https://doi.org/10.2307/744001.
Sponsier, C. (1992). “Narrating the Social Order: Medieval Clothing Laws”. CLIO,
21(3), 265-83.

Part 2
Fiscal and Monetary Policy
43
Recovering from the Economic

Impact of COVID-19
Who Should Pick Up the Bill
for the British Lockdown?
Peter Scott
Abstract This chapter examines what lessons can be learned from three previous
crises that created public debt mountains of similar magnitude to the pandemic: the
First World War, Second World War, and Credit Crunch. In all three cases the Treasury
pressed for drastic spending cuts, to maintain confidence in sterling and the City. How-
ever, in the one case where the Treasury’s advice was rejected, there was a substantially
stronger recovery. The Treasury has similarly lobbied for austerity measures to deal
with the COVID-19 government debt, again raising the spectre of slow growth and mass
unemployment.
Keywords COVID-19. Austerity. Economic recovery. Treasury. Bank of England. Re-

covery policy.
Summary 1 Introduction. – 2 The First Crisis: 1914-31. – 3 The Second Crisis: 1939-
51. – 4 The Third Crisis: 2008-15. – 5 Lessons for the Pandemic.

ISBN [ebook] 978-88-6969-442-4
Open access 45
2020-07-31
DOI 10.30687/978-88-6969-442-4/003
Peter Scott
1 Introduction
Aside from its terrible human toll (which will have enduring impacts),
the economic costs of the coronavirus pandemic will be catastrophic,
both in the short and longer term. Can Britain learn anything from
three previous episodes of international crises that massively in-
creased its national debt, while destabilising the domestic and world
economies: the First and Second World Wars and the Credit Crunch?
In some respects, the coronavirus pandemic is different from these
crises – it inflicts no significant damage on physical infrastructure; it
has not skewed industrial output towards a ‘war economy’, and – un-
like the Credit Crunch – it has not laid bare more fundamental in-
stabilities and insolvencies among key sectors and firms. However,
in common with these crises, it will hugely inflate government debt,
while generating further costs of economic reconstruction, to save
businesses that are fundamentally solvent, but have been driven to
the brink of collapse by the lock-down. Britain will also face a major
expansion in unemployment and other welfare costs, at least in the
short and medium term.
The previous crises are illuminating in showing the solutions that
British policy-makers have repeatedly advocated. Influential voices
(particularly the Treasury, Bank of England, and leading bankers and
City figures) repeatedly advocated placing much of the burden of ad-
justment on lower income groups, via policies of savage deflation and
public expenditure cuts. In only one case did politicians reject this ad-
vice, in the special circumstances of an electorate who had learned the
lessons of the government response to the First World War aftermath
and took the opportunity of the 1945 election to vote in a radical gov-
ernment, committed to social reconstruction and the welfare state.
2 The First Crisis: 1914-31
The First World War was both an unprecedented humanitarian dis-

aster and a huge negative shock to the international economy. Both
belligerents and neutral countries greatly expanded their industri-
al production, especially for staple commodities such as coal, iron
and steel, and textiles (which formed the core of Britain’s industrial
base), creating a problem of massive excess capacity following the
Armistice (Scott 2007, 74-85). Until the final months of war, it had
been assumed that the outcome would probably be a stalemate, with
a strong Germany possibly switching from a fighting war to an eco-
Thanks are due to Paloma Fernandez Perez, Daniel Raff, Andrew Smith, and Simone
Varotto, for comments on earlier drafts. Any errors are mine.

Peter Scott
nomic conflict with Britain (Cline 2017, 157-81). This challenge was
to be addressed by policies of industrial reconstruction and job cre-
ation – partly via a massive building programme of ‘homes for he-
roes’ (state-subsidised municipal housing). However, the Treasury
and Bank of England were strongly opposed to this strategy, which
ran counter to their own plans for savage deflation, to bring the
pound back to its pre-war gold standard parity and restore the City
to its status as the world’s main financial centre (Peden 2000, 125).
Germany’s sudden military collapse in autumn 1918 enabled the
Treasury and Bank of England to implement their deflationary strate-
gy (Garside 1998, 27-9). This contrasted with the policies of most ma-
jor European nations, including Germany, France, and Italy, which, to
varying degrees, relied on inflationary policies to reduce their debt’s
real value. Adopting such a solution in Britain would have made a re-
sumption of Bank of England co-ordination of the international gold
standard impossible, while shattering ambitions for a resumption of
the City’s status as the world’s leading financial center (that, in any
case, proved illusory). It would have also adversely impacted the mid-
dle classes – the bedrock of Conservative electoral support – by dras-
tically reducing the value of their fixed-interest stocks (Daunton 2002,
64-6). Sparing the middle-classes by focusing on paying off the debt
nevertheless enraged the very constituency that the policy was de-
signed to protect, as it entailed high taxation (by pre-1914 standards).
The standard rate of income tax rose from 5.8% in 1913-14 to an inter-
war peak of 30% during the 1918-19/1921-22 tax years (Daunton 2002,
883-9). Top rates were much higher, but a failure to address growing
tax avoidance/evasion allowed the super-rich to dodge a growing pro-
portion of their taxes (Scott, forthcoming).
Returning to gold at pre-war parity (£1 = $4.86) required substan-
tial price falls to counter war-time inflation. However, the govern-
ment’s deflationary policy mainly acted to increase unemployment
rather than reduce prices. Nevertheless, in April 1925 the Chan-
cellor, Winston Churchill, took Britain back to gold at its old pari-
ty (which proved to be substantially over-valued). As John Maynard
Keynes famously noted, what he estimated to be a 10% sterling over-
valuation meant that:
whenever we sell anything abroad, either the foreign buyer has

to pay 10 per cent more in his money or we have to accept 10 per
cent less in our money. That is to say, we have to reduce our ster-
ling prices, for coal or iron or shipping freights… by 10 per cent
in order to be on a competitive level, unless prices rise elsewhere.
(Keynes 1970, 23; emphasis in original)
Britain was a negative outlier in terms of its poor economic growth

during the 1920s, largely as a result of deflationary policy – which
Peter Scott
continued after 1925 in order to defend its over-valued exchange rate

(Eichengreen 2004, 322-3). Ultimately the policy was not sustainable;
a loss of international confidence in sterling triggered a political cri-
sis in the summer of 1931 and one of the first acts of the new Conserv-
ative-led ‘National’ government was to take Britain off the gold stand-
ard. Contrary to the Treasury and Bank of England’s dire predictions,
the value of the pound did not collapse, but settled at a more interna-
tionally competitive rate, which assisted Britain in achieving one of
the strongest recoveries from the 1929-32 depression. However, de-
spite a surge in economic growth and employment, the staple indus-
tries (principally coal, iron and steel, and textiles) were slow to recov-
er from a decade of being priced out of international markets, creating
what proved to be a permanent north-south divide in British prosperity.
3 The Second Crisis: 1939-51
The Second World War saw a much wider mobilisation of domes-

tic resources than the First, in a conflict where, for a time, Britain
stood alone. At its peak, almost all working-age adults, including ci-
vilians, were subject to some sort of conscription and, thanks to the
Luftwaffe, many urban residents faced a real threat of death or injury.
Government accepted the imperative to keep food and other neces-
sities both affordable and available, via a system of rationing, price
controls, and subsidies. These policies sharply reduced living stand-
ards for the upper and middle classes, while improving the nutrition
of many manual workers’ families. Rationing did not remove dispar-
ities in living standards – the affluent retained their better housing,
could still dine at smart restaurants where food was unrationed, and
enjoyed better food at home by using the ration coupons of their do-
mestic servants. However, the system was based on equality of sac-
rifice and “fair shares” for all, according to needs, rather than wants
(Roodhouse 2013, 2-6).
Contrary to some popular accounts, there was no consensus within
the war-time government that post-war economic policy should priori-
tise domestic reconstruction and Keynesian full-employment policy. An
influential coalition of Bank of England and Treasury officials advocat-
ed an economic policy based on prioritising the restoration of sterling’s
credit-worthiness – in the face of Britain’s huge war debts – through
another round of severe deflation. Keynes criticised this group for pri-
oritising international “obligations” over the war-time commitment to
build a fairer society – which would amount to a repetition of the 1920s
gold standard debacle – though his direct influence was ended with his
untimely death in April 1946 (Newton 2004, 262-3).
However, the deflationary lobby failed to appreciate the drastic
change in popular opinion, reflecting the levelling tendency in socie-
Peter Scott
ty brought about by the collective nature of the war effort. Most sen-
ior politicians recognised the impracticalities of the Bank of England’s
‘sterling first’ policy, while the remainder had their dreams shattered
by Labour’s landslide 1945 election victory. Clement Atlee’s 1945-51
Labour governments used a continuation of rationing and other war-
time direct controls to create a comprehensive welfare state and na-
tionalise what Labour saw as key areas of the economy, while avoiding
any deflationary plunge into recession. Moreover, they achieved sub-
stantial economic growth, with GDP rising at a respectable 2.5% per
annum from 1946-51. The October 1951 election saw the return of a
Conservative government, which increasingly followed Treasury and
Bank of England advice to prioritise a strong and stable pound and an
early re-opening of the City, over wider domestic economic and social
reconstruction. Nevertheless, many of the gains of the Attlee era, in-
cluding the NHS, the welfare state, and a commitment to full employ-
ment, persisted.
4 The Third Crisis: 2008-15
The Credit Crunch was a very different type of economic shock than
the two world wars, in part a financial crisis (on a scale never seen
before), but also a crisis of the global economic system. From the
1980s, governments had increasingly ceded their regulatory func-
tions to markets, private sector institutions, and central banks, on
the basis of a philosophy that markets could fix any problems they
could create, if set free from the heavy hand of the state. However,
the events of autumn 2008 shattered this myth, as the spike in equi-
ties, house prices, and securities based on home mortgages suddenly
burst, threatening to bring down the international financial system.
The subsequent fall in house and equity prices over 2008-09 wiped
out $1.5 trillion of British household wealth, equivalent to 50% of GDP
(according to an IMF estimate), with 10% of home-owners facing neg-
ative equity (Tooze 2019, 156). Internationally, trillions of pounds of
taxpayers’ money was mobilised by the world’s leading industrial na-
tions, to save banks from their own mistakes and mismanagement.
The new reality produced a rapid, if short-lived, ideological volte-
face, with many of the people who had hitherto been the strongest ad-
vocates of market-based solutions making ever-more desperate pleas
for massive government bailouts. As former Federal Reserve chair-
man Alan Greenspan admitted, “I made a mistake in presuming that
the self-interest of organisations, specifically banks and others, was
such that they were best capable of protecting their own sharehold-
ers” (Beattie, Politi 2008).
Across the developed world, eye-wateringly expensive bank bail-
outs were mobilised, via loans, recapitalisations, asset purchases, and
Peter Scott
state-backed guarantees. These were reinforced by similarly huge

government economic stimulus packages to prevent a global economic
meltdown. Gordon Brown’s plan to recapitalise Britain’s ailing clear-
ing banks, while taking equity stakes in them, is generally regarded
as one of the most successful bank bailouts (though the Labour gov-
ernments of which he had been Chancellor, then PM, must shoulder
substantial responsibility for earlier failures to introduce stronger
regulation) (Tooze 2019, 190-2). Meanwhile Britain’s clearing banks
were remarkably unrepentant. For example, RBS – the world’s larg-
est bank on the eve of the crisis, based on its 2008 balance sheet – in-
sisted on honouring £1 billion of bonus contracts, despite just having
been saved from bankruptcy by an enormous injection of taxpayers’
money (Tooze 2019, 292). Then, once the crisis was averted, the banks
aggressively lobbied for a quick return to business as usual.
As in 1919 and 1945, the Treasury lobbied for prioritising deficit
reduction over maintaining living standards (Tooze 2019, 349). The
6th May 2010 general election failed to produce a Parliamentary ma-
jority, with the Tories gaining the most seats and the Liberals holding
the balance of power. However, negotiations soon revealed the Lib-
erals’ top team to be dominated by economic liberals, having much
more in common with the Tories than with Labour. They thus signed
up to a Conservative programme of ‘austerity’, in stark contrast to
their manifesto pledges. This was a very different brand of auster-
ity than that employed by the 1945-51 Labour governments, based
around ‘fair shares’ and equality of sacrifice. Instead, austerity was
disproportionately targeted on lower income groups, cutting welfare
benefits and raising regressive taxes, particularly VAT. The rich were
much less impacted, largely due to their ability to avoid or evade tax-
ation and make capital gains through borrowing at historically low
interest rates to purchase houses or other scarce real assets, which
rose in value owing to the volume of cash chasing them (Moore 2016).
One major element of the Tory-Liberal austerity was a further roll-
ing back of the welfare state. From September 2009 to July 2016 over
one million public sector jobs were cut or transferred to the private
sector (outstripping the earlier cuts by the Thatcher or Major gov-
ernments) (Tooze 2019, 350). This included substantial cuts in police
numbers (followed, several years later, by an epidemic of gun and
knife fatalities), while the NHS was progressively starved of resourc-
es (relative to its sector-specific inflation rate), leaving it ill-equipped
to cope with a major flu epidemic, let alone the worst pandemic for
a century. There were also deep cuts in welfare benefits. The 2012
Welfare Reform Act replaced unemployment-related and income ben-
efits by Universal Credit. Despite some positive features (such as ra-
tionalising the benefits system), it required claimants to wait over
a month before receiving their first payment. As many had little or
no savings, waiting five or six weeks without money often led to be-
Peter Scott
ing evicted from their homes and/or amassing huge debts to ‘pay-
day lenders’, charging extortionate interest rates. This plunged sub-
stantial numbers of families into the type of deep absolute poverty
not seen in Britain since the 1930s, including several cases of death
by starvation for vulnerable people refused benefits (Butler 2020).
5 Lessons for the Pandemic
The pandemic is creating a debt burden of similar magnitude to these

earlier crises. Britain’s budget deficit is likely to approach £350 mil-
lion by the end of 2020, while the national debt is expected to rise to
over 100% of GDP (Warner 2020). However, this time there is particu-
larly widespread support for an expansionary solution, from a broad
range of the political spectrum. Influential commentators have point-
ed out that debt is not as big a problem as the ‘Treasury view’ sug-
gests. Major trading nations typically borrow in their own curren-
cy, from their own people – though the debtors and creditors are not
one and the same. Government debt is disproportionately owned by
the rich, but less so than was the case in 1920 or 1945, owing to the
rise of institutional investors that view government debt as a safe,
if low yielding, asset.
Adam Tooze and others have suggested that a wealth tax and/or
a move against corporate and personal tax evasion would more fair-
ly realign debt holders and payers, thereby avoiding the recent pat-
tern of lower income groups being the main losers from crises and
recessions. Moreover, these policies would avoid deflation and thus
stimulate growth, in turn reducing the aggregate burden of the debt.
Another round of Quantitative Easing would assist growth and the
debt burden, while also further lowering interest rates and internal-
ising the debtor-creditor relationship (the state owes debts to itself).
‘Printing money’ is potentially inflationary, but given the strong de-
flationary momentum of a ‘depression’ (even a threatened one) infla-
tionary pressures are severely muted (Tooze 2020). While Britain’s
debts from the crisis appear staggering, they are unremarkable com-
pared to the other G7 nations (which have typically introduced larg-
er stimulus/support packages) and Britain has the advantage of ‘safe
haven’ appeal to investors facing turbulent international conditions.1
In addition to the obvious moral case for equitably spreading the
costs of a catastrophe that has impacted all sections of society, there
is also a strong economic case. As table 1 shows, while the deflation-
1 “The Guardian View on Government Debt: Sensible, not Spendthrift”. The Guardi-
an, 14 May 2020, 2. https://www.theguardian.com/commentisfree/2020/may/14/the-
guardian-view-on-government-debt-sensible-not-spendthrift.

Peter Scott
ary solutions pushed by the Treasury and Bank of England after the
First World War and the Credit Crunch may have been beneficial for
the City of London and the banking and financial sectors, this came
at the cost of very slow aggregate growth. In contrast, the more ex-
pansionary and broadly-based policies pursued by the Attlee Labour
governments achieved significantly higher growth, without prevent-
ing them from pursuing other priorities, such as physical reconstruc-
tion and founding the modern welfare state.
Table 1 Average GDP growth per annum during the first five, and ten, years
following the three crises
Average GDP growth for recovery

Crisis Starting year 5 years 10 years
First World War 1919 -0.71 0.79
Second World War 1946 2.45 2.92
Credit Cruch 2009 1.94 1.86
Source: Williamson, S.H. (2020). “Annualized Growth Rate of Various Historical

Economic Series”. MeasuringWorth. https://www.measuringworth.com/
calculators/growth/index.php (UK GDP growth index)
Many eminent contemporary economists, notably J.M. Keynes in the

first two crises and – during the Credit Crunch – Paul Krugman, were
deeply critical of policy prescriptions that would both generate mass
unemployment and reduce growth (Keynes 1931; Tooze 2019, 372).
In 2020 there are particularly strong reasons for choosing an expan-
sionary strategy, aimed at boosting growth by creating the necessary
conditions for the recovery of businesses hit by the crisis. First, this
crisis is different from the three discussed above in that there is no
‘fundamental disequilibrium’ in the economy from inflationary pres-
sures, speculative euphoria, world overproduction, or physical cap-
ital destruction. The problem is mainly one of hugely enlarged gov-
ernment debt, which could be addressed by long-term funding, taking
advantage of extraordinarily low interest rates. As long as econom-
ic growth out-paces the interest rate on government bonds, the real
burden of the debt will fall over time, even if it is never paid-off (Houn-
sel 2020). The government could also follow Gordon Brown’s prec-
edent in insisting that loans to ailing businesses should include an
equity stake for the government. In addition to reducing firms’ debt
problems, this would also effectively compel shareholders to make a
contribution to their companies’ financial support.
Secondly, there is plenty of scope for raising tax rates for the
rich. In 1970 the top 0.1% and top 1% of personal incomes had in-
come shares of 0.73 and 4.83% of all post-tax personal income. How-
Peter Scott
ever, tax cuts during the 1980s and 1990s, together with growing
tax avoidance (facilitated by the abolition of capital export controls),
boosted their respective incomes shares to 3.5 and 10.3% by 2000,
while the twenty first century has seen further pre- and post-tax in-
come share gains for these groups (Atkinson 2007, 104-5). Even a par-
tial reversal of their tax cuts and tax evasion loopholes could greatly
increase the income tax take, especially if accompanied by effective
measures against tax avoidance/evasion. There is also good reason to
think that initiatives to tackle endemic personal tax avoidance/eva-
sion would command stronger international support than in the pre-
COVID-19 era. Most other major nations face similar imperatives to
increase the tax take. British governments have played no small role
in covertly supporting the tax avoidance industry, as part of a broad-
er strategy to support the City of London. If the UK showed that it
was finally serious about addressing tax avoidance/evasion, it might
find strong support among other European nations.
Higher taxes for top incomes are also likely to be more politically
acceptable in the wake of the pandemic. Government has taken on re-
sponsibilities to maintain the incomes of a substantial proportion of
the population, together with interventions in the lives of British citi-
zens on a scale unprecedented in peacetime. This has produced a ‘lev-
elling tendency’ reminiscent of the Second World War. For example,
the iron curtain that had separated the NHS and the private hospi-
tal sector was suddenly torn down in March 2020, effectively requisi-
tioning (by agreement) all private hospital capacity (Neville, Plimmer
2020). A more tacit, but possibly more important, trend has been the
re-evaluation of the societal ‘worth’ of occupations which, despite be-
ing skilled, have become relatively less well-paid since the 1980s, es-
pecially the nursing and other ‘caring’ professions. While during Te-
resa May’s administration her Chancellor, Philip Hammond, could
brusquely sweep aside calls to remove the austerity-induced cap on
public sector pay by stating that public-sector workers were already
‘overpaid’ (Walker 2017), television coverage of NHS and other carers
working long shifts at real risk to their lives (largely owing to short-
ages of vital equipment) gave the public a more realistic view of their
calling. NHS and other care workers have emerged as the heroes of
this conflict, as evidenced by an outpouring of popular support, rang-
ing from the Thursday night clapping ritual to street art.
While both May and, especially, Hammond, were arch fiscal con-
servatives, Boris Johnson’s interventionism during the COVID-19
emergency and his longer-term record as London mayor paints a more
complex picture of a politician who is at least prepared to consider
other options if the political climate is conducive. With the possible
exception of Winston Churchill’s war-time government, Conservative-
led administrations have typically preferred the “Night Watchman
state” model, of intervention only to reset the market mechanism,
Peter Scott
rather than the Bismarckian “developmental state” (Bresser-Perei-

ra 2016). However, it is at least plausible that this might be up for re-
evaluation, especially if the public and academics show their support
for an expansionary route out of this crisis rather than another sac-
rifice of British economic growth and living standards to meet the
narrow interests of the City and the banks.
However, while the Bank of England appears to be broadly support-
ive of an expansionary policy, the Treasury has reverted to type. Cor-
onavirus debts threaten to become “the battering ram for a new cam-
paign of austerity” (Tooze 2020). A leaked 5th March 2020 Treasury
assessment proposed a package of tax increases and spending cuts
(including a two-year public sector pay freeze) – equivalent to a 5%
increase in the basic rate of income tax – to “enhance credibility and
boost investor confidence”, despite there being no signs of investors
losing confidence in Britain.2 Even the normally conservative Daily
Telegraph was appalled, publishing an article beginning, “There is a
special place in Purgatory for Her Majesty’s Treasury… Its COVID-19
blueprint for fiscal retrenchment borders on macroeconomic insani-
ty [...] The thinking is a throwback to the inflexible ‘Treasury View’”,
that so exasperated John Maynard Keynes (Evans-Pritchard 2020).
One of the most important lessons from all four crises is that
the Treasury is past its sell-by date; indeed it was already past it in
1920. A particularly valuable administrative innovation would be to
replace the Treasury with an economics ministry, with a remit giv-
ing equal weigh to economic growth and the Treasury’s traditional
finance functions. However, any real change would require a whole-
sale cull of senior staff, replacing the Treasury mandarins with pro-
fessional economists. Only then will the British economy finally be
able to break free from the Treasury’s dead hand.
2 “Treasury says virus to cost £300 bn as it warns of tax rises and pay freeze: confi-
dential analysis of economic impact lays out options for the Chancellor to cover extraor-
dinary expense of lockdown”. Daily Telegraph, 13 May 2020, 1. https://www.press-
reader.com/uk/the-daily-telegraph/20200513/281479278596293.

Peter Scott
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The European Repo Market,

ECB Intervention
and the COVID-19 Crisis
Monica Billio
Michela Costola
Francesco Mazzari
Loriana Pelizzon
Leibniz Institute for Financial Research SAFE, Frankfurt, Deutschland;
Abstract During the COVID-19 crisis, the combined effect of ECB communications,
concerns on sovereigns’ stability, illiquidity and market expectations led to a flight to
quality. This produced a sell-off of peripheral sovereign bonds that drove the repo rates
of core and peripheral countries out-of-sync. Two ECB announcements affected the repo
market, namely (i) the Press Conference of the ECB Governing Council on March 12, 2020
and (ii) the announcement of a €750 billion Pandemic Emergency Purchase Program
(PEPP). These two announcements had heterogeneous effects in the European repo
market which we shall investigate.
Keywords COVID-19 crisis. ECB announcements. European repo market. Repo spe-
cialness. Flight-to-quality.
Summary 1 Introduction. – 2 The European Repo Market in the Last Decade. – 3 The
European Repo Market During the COVID-19 Crisis. – 4 Conclusions.

ISBN [ebook] 978-88-6969-442-4
Open access 57
DOI 10.30687/978-88-6969-442-4/004
Monica Billio, Michela Costola, Francesco Mazzari, Loriana Pelizzon
The European Repo Market, ECB Intervention and the COVID-19 Crisis
1 Introduction
The outbreak of the COVID-19 pandemic and the unprecedented lock-

downs imposed by European member states in March 2020 marked
the beginning of a crisis in the repurchase agreements (namely ‘re-
po’) market. As a result, repo rates of European core countries (i.e.
Germany, France, the Netherlands and Belgium) and peripheral coun-
tries (i.e. Spain, Italy, Greece, Ireland and Portugal) went out-of-
sync.1 The events during this period not only shed light on the role
of illiquidity and ECB announcements in this market, but also on the
tight nexus between the repo and the secondary bond cash market.
The repo market plays an essential role in banks’ liquidity and col-
lateral management as well as in the transmission of monetary poli-
cy (Cœuré 2017). Therefore, changes in monetary policy may impact
on the repo rate and the wider financial system.
This paper investigates how monetary policy announcements by
the ECB and specifically its quantitative easing announcements af-
fected European repo rates during the COVID-19 crisis. This is a
time when many firms needed access to the repo market in order
to manage intraday liquidity and collaterals. In particular, we high-
light how flight-to-quality impacted the repo market during the pan-
demic and how the repo market is strongly influenced by ECB mon-
etary announcements.
2 The European Repo Market in the Last Decade
The market for repos consists of secured, over-collateralised, short-

term, two-leg money market transactions in which the cash-taker si-
multaneously sells a security at the current spot price and enters into
a forward agreement to buy the security back at a pre-specified price.
The difference between the selling and purchasing price of the security
is the repo rate. Repo contracts are either driven by the need for fund-
ing (i.e. General Collateral - GC transactions) or the need for a specific
collateral (i.e. Special Collateral - SC transactions). In GC transactions,
the exchanged collateral is unspecified and can be chosen amongst a
basket of deliverable securities. However, in SC transactions, the col-
lateral to be exchanged is specified. This is why special repos are en-
tered into at a lower rate than general collateral repos because collat-
1 In the European Union, peripheral countries are characterised by high debt-to-GDP-

ratios, lower employment levels and lower GDP per capita ratios (Kinsella 2012). Cluster-
ing between the core and the periphery was especially highlighted during the 2010-12
sovereign debt crisis. Peripheral countries were the Member States that have been hit
the most by the crisis. In this paper, the peripheral countries that are analysed are Italy
and Spain and the core countries are Germany, France, the Netherlands and Belgium.

eral scarcity may be envisaged as a dividend for the cash-taker, i.e. a

convenience yield for holding the collateral rather than the cash. The
collateral traded on such transactions is said to be ‘on special’, so that
its repo rate is lower than the corresponding GC repo rate. With the De-
posit Facility Rate (DFR), the rate at which the Central Bank remuner-
ates reserves, being lower than zero, we have also started to observe
negative repo rates. This implies that the buyer (who is lending cash)
effectively pays an interest to the seller, who is borrowing cash (ICMA
2013) or, put differently, the lender pays a fee to borrow the collateral.
In the European market, repo agreements are mostly entered into
three dealer-to-dealer electronic trading platforms: Eurex Repo, Bro-
kerTec and MTS (mostly for the Italian market), which link to several
central clearing counterparties (CCPs), such as LCH.Clearnet LTD,
LCH.Clearnet SA and Cassa di Compensazione e Garanzia (CC&G)
for the Italian market (Mancini, Ranaldo, Wrampelmeyer 2015). Eu-
rex Repo GmbH is the leading platform for GC transactions and re-
lies on Eurex Clearing AG (Deutsche Boerse Group) as CCP and on
Clearstream for collateral management and settlement. This plat-
form uses mainly two baskets to manage transactions: the GCP ECB
basket and the ECB EXTended basket. BrokerTec is the largest plat-
form for SC transactions and is operated by ICAP plc. MTS is part of
MTS Group whose majority stake is owned by the London Stock Ex-
change (Mancini, Ranaldo, Wrampelmeyer 2015).
Repo contracts are said to be over-collateralised as a haircut is ap-
plied to each operation in order to account for credit and liquidity risk.
The collateral value is given by the difference between the market val-
ue of the traded collateral and the market value of the portion of col-
lateral used as haircut. The securities for which the lowest haircut is
applied are central government bonds. However, sovereign risk in the
euro area varies widely between core and peripheral countries. For this
reason, the rate at which an investor is willing to lend cash in exchange
for a collateral differs according to the sovereign risk of the collateral.
This aspect is well represented in figure 1 which shows the Repo-
Funds Rate (RFR) indexes for Belgium, France, Germany, Italy, the
Netherlands and Spain as well as the average repo rate for the Eu-
rozone [fig. 1]. RFRs are based on the average of both general and
special collateral transactions settled on the three aforementioned
platforms where the collaterals accepted are all government bonds.
As it is shows, in January 2010, there was almost no difference in
the RFR indexes for all the countries considered, i.e. the market was
not charging different rates for transactions based on the German
Bund or the Italian BTP. However, starting with the Greek sover-
eign crisis, repo rates began to diverge. The figure reports that the
RFR indexes for Germany and the Netherlands are the lowest from
that date onwards, indicating that German and Netherlands govern-
ment bonds represent the safest collateral traded in the market. By
contrast, the RFR index for Italy is riskiest collateral among the an-
alysed countries in most of the sample period (with Spain occasion-
ally taking the lead).
More generally, figure 1 gives a historical representation of the ef-
fects of the ECB’s Balance Sheet Policies (BSPs) announcements on
the repo market since the sovereign debt crisis (outliers are trimmed).2
Figure 1 RFRs from 2010 and some major announcements
This figure shows the average daily repo rates for six European countries (Belgium,
France, Germany, the Netherlands, Italy and Spain) as well as the average repo rates
for the Euro, the deposit Facility Rate offered by the ECB and five event lines. The five
event lines represent: (1) SMP announcement on May 10, 2010; (2) Announcement of
the 3 years Longer Term Refinancing Operations on December 8, 2011; (3) Outright
Monetary Transactions (i.e. OMT) announcement on August 2, 2012; (4) Targeted Longer
Term Refinancing Operations (TLTRO) on June 5, 2014; (5) Cash Security Lending Facility
announcement on December 8, 2016. Repo Funds Rate data has been downloaded from
http://www.repofundsrate.com/ for the Netherlands, Belgium, Spain, France,
the European Union, Germany and Italy. The RFR Netherlands and RFR Belgium time
series start from May 16, 2016. Data on RFR Spain starts from August 6, 2012. The Deposit
Facility Rate time series has been downloaded from the ECB’s Statistical Data Warehouse.
2 For a detailed description of the evolution of the repo market during the sovereign
crisis of 2010-12 see Corradin, Maddaloni 2019.

The pattern of the repo market is quite striking in the period after
the QE announcement, i.e. after 2015. The implementation of a buy-
and-hold Public Sector Purchase Program (PSPP) led (mostly) Nation-
al Central Banks to buy central government bonds in the secondary
cash market, in turn reducing the availability of collateral for repo
transactions. The QE produced the strongest effects on repo rates
of the safest countries due to their superior funding conditions, in-
creasing scarcity until even GC rates were pushed below zero. Fur-
thermore, two regulatory factors contributed to increase the scarci-
ty of High Quality Liquid Assets (HQLA) at reporting dates. Firstly,
the implementation of the Basel III non-risk-weighted capital require-
ments, such as the leverage ratio, strengthened window dressing in
banks’ balance sheets, increasing the scarcity of the safest collateral
in these dates. Secondly, accounting practices and the implementa-
tion of the European market infrastructure regulation (EMIR) creat-
ed an opposite shock for the demand and supply of repo transactions
in the periods in which these contracts were needed the most (Ranal-
do, Schaffner, Vasios 2019). For these reasons, core countries’ RFRs
are affected by quarterly negative spikes, as the scarcity of HQLA
is the highest in these periods. Interestingly, the effect on peripher-
al countries is the opposite. As one can see from figure 2, RFR Ita-
ly reached record-high levels on the same dates, due to the intrinsic
risk of the collateral [fig. 2]. The average European effect has been
negative overall.
This effect has been exacerbated through time, as highlighted in
figure 2. The figure shows that the joint effect of the scarcity chan-
nel activated by the implementation of unconventional monetary pol-
icies and the enforcement of non-risk-weighted capital requirements
in the Basel III framework inverted the usual relationship between
repo rates and the DFR. This might be surprising given that at the
DFR the ECB remunerates the excess reserves of banks, preventing
transactions in the money market to be concluded at a lower inter-
est rate. However, as Arata et al. (2020) demonstrate, Basle III pre-
vents banks that have access to the ECB to arbitrage away transac-
tions concluded in the repo market at a lower interest rate than the
DFR. Even if core countries’ repo rates adjusted to the 50 basis point
cut of the DFR on September 18, 2019, scarcity and market segmen-
tation affected their levels by pushing them below it.
3 The European Repo Market During the COVID-19 Crisis
How does the European repo market react to the COVID-19 crisis?
In this section we highlight the role of policy announcements, con-
cerns on sovereigns’ stability, scarcity and market expectations on
the economic outcomes of the health crisis in the repo market tur-
Figure 2 RFRs in 2019 and 2020
This figure reports the RepoFunds Rates (RFRs) between August 2019 and May 2020.
The blue dashed event line represents the change in the Deposit Facility Rate (DFR)
occurred on September 19, 2019. RFR data has been downloaded from http://www.
repofundsrate.com/ for the Netherlands, Belgium, Spain, France, the European
Union, Germany and Italy. The DFR time series has been downloaded from the ECB’s
Statistical Data Warehouse.
moil of March 2020. The unfolding and resolution of the tensions de-
veloped mostly in a few weeks.
Three events characterised the evolution of the crisis: (i) the lock-
down in Italy at the end of February and first half of March, 2020;
(ii) the Press Conference of the ECB Governing Council on March,
12 2020, and; (iii) the announcement of a € 750 billion Pandemic
Emergency Purchase Program (PEPP) on March 18, 2020. Figures
2 and 3 depict the three events and the heterogeneous consequenc-
es of the announcements in the repo market. In figure 3, the sam-
ple of countries analysed is restricted to two core countries, name-
ly France and Germany, and two peripheral countries, namely Italy
and Spain, to better focus on the dynamic between the core and the
periphery [fig. 3].
Figure 3 RFRs during the COVID-19 crisis
This figure shows the RFRs during the COVID-19 crisis for two core countries (Germany
and France) and two peripheral countries (Spain and Italy). The figure also reports six
event lines that represent: (1) Enforcement of health measures in Italy on February 21,
2020; (2) Beginning of the lockdown in Italy on March 9, 2020; (3) Meeting of the ECB
Governing Council on March 12, 2020; (4) Activation of swap lines between the Bank
of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the
Federal Reserve, and the Swiss National Bank on March 18, 2020; (5) Announcement
of the Pandemic Emergency Purchase Program on March 18, 2020; (6) Beginning of the
Lockdown in Spain on March 28, 2020. RepoFunds Rate data has been downloaded
from http://www.repofundsrate.com/ for Spain, France, Germany and Italy.
Figure 2 shows that the six countries considered in our analysis en-
tered the COVID-19 crisis with different repo rates. The RFRs of Ita-
ly and Spain and the average Repo-Funds Rate of the Eurozone were
above the DFR, whereas the average RFRs of core countries were be-
low the DFR. The difference between the Italian RFR and the German
RFR indexes was equal to about 7 basis points, which was impacted
a lot by the COVID-19 crisis. By March 17, this difference more than
doubled and reached 17 basis points as the Italian RFR increased and
the German and French RFRs significantly decreased.
The figures review the differential effects of the policy announce-
ment on the repo market. Italy and Spain are the two countries most
severely hit by the coronavirus, societally as well as economically.
Figure 3 already shows a large increase of the Italian repo rates af-
ter the national lockdown was imposed, but the Italian RFR, on the
one hand, and the German and French RFRs, on the other, started to
significantly diverge after the first policy announcement. Figure 3 de-
tails that repo rates signalled early warnings of distress in the first
half of March. Indeed, as the consequences of the pandemic materi-
alised in Italy, concerns regarding the future economic and political
measures that the country would have to implement started mount-
ing. As a result, a sell-off of securities started in this period (ICMA
2020), making RFRs to trend downwards. However, this effect was
not limited to core countries. Although March 2020 was character-
ised by a general appreciation of repo rates, the actual distress start-
ed after the first policy announcement on March 12, 2020. This event
marked the beginning of a downwards adjustment of core countries’
repo rates, making them persistently move out-of-sync with respect
to the peripheral ones.
On March 12, the meeting of the ECB Governing Council deliber-
ated measures aimed at addressing the increasing distress in finan-
cial markets as the health crisis was spreading in Western Europe.
In particular, the Council adopted a dovish monetary policy stance
focused on liquidity injections via additional (Targeted) Longer-Term-
Refinancing-Operations. Additionally, it eased collateral eligibility
criteria for securities pledged in Open Market Operations (OMOs).
Moreover, to support the private sector, the Council decided to ex-
pand the existing Private Sector Purchase Programs, up until the
effects of the crisis would diminish. Such measures were different
from the ones taken by other Central Banks. For instance, the Fed-
eral Reserve cut interest rates by 150 basis points between March
3, 2020 and March 15, 2020. On March 15, 2020, in contrast to the
first attempts of a quantitative tightening in 2019, the Fed opted for
the implementation of a new QE to support the smooth functioning of
the market and the effective transmission of monetary policy. None-
theless, the dovish stance of the ECB Governing Council, a looming
economic downturn and the ECB President’s statement that closing
spreads between member states’ funding costs is not an ECB objec-
tive, failed to alleviate market tensions. Rather, the announcement
re-awaked concerns on the financial stability of sovereigns, raising
questions on the ability of peripheral countries struggling to tack-
le the coronavirus (like Italy) to cope with increased debt issuance.
Consequently, the statement by the ECB President resulted in a flight
to quality assets, which gave rise to a sell-off of the riskiest securi-
ties. In addition, spreads widened in the cash market and core repo
rates collapsed to unprecedented levels in times when reporting ob-
ligations were not binding. In fact, the effects produced were mod-
erate with respect to 2019-year end effects (ICMA 2020), but persis-
tent and clustered between core and peripheral countries. Indeed,
RFRs based on the safest collateral, plummeted to record lows, as
those treasuries were valued more with respect to the ones of oth-
er Eurozone states.
Another aspect highlighted by figure 3 is that the French RFR
reached a negative peak at -65.5 basis points, which is even lower
than the one of Germany which stood at -63.6 basis points. This is
surprising as Germany is almost invariably the preferred safe hav-
en in the sample period as shown in figures 1 and 2. However, the ef-
fect might be due to the fact that, in the European Union, the bulk
of dollar-denominated transactions is carried out by French banks.
By pledging collateral against liquidity, the amount of French sover-
eign bonds outstanding decreased, hence increasing their scarcity
and decreasing their repo rate. In general, in the whole sample rep-
resented in figure 2, one can see that rates collapsed, and scarcity
increased for several countries. But the impact on RFR Italy and RFR
Spain was heterogeneous. Indeed, while the Spanish repo rate mildly
cheapened during the week after the announcement, RFR Italy sig-
nificantly appreciated in the same period. The level of uncertainty
for Italian sovereigns was such that the Repo Funds Rate moved out-
of-sync with respect to the sample of countries analysed. For these
reasons, there is evidence that the joint effect of sovereign condi-
tions and the severity of the virus played a major role in driving re-
po rates, as the effects on Italy and Spain were significantly differ-
ent. The worsening of the health conditions in the latter country did
not generate effects akin to the ones produced in the former. Howev-
er, the response of Spanish RFR may be affected by the second policy
announcement described below. As it became clear that the spread
of COVID-19 was not only regional and that the number of cases was
increasing in all Western Europe, the tensions on the first policy an-
nouncement compounded up until the second policy event on March
18, 2020, when the ECB Governing Council decided to implement a
€750 Billion Pandemic Emergency Purchase Program (PEPP). Indeed,
the announcement marked the nadir of the crisis as it restored mar-
ket confidence into the stability of distressed sovereigns and alleviat-
ed pressures in the secondary bond cash market. For these reasons,
the sell-off of risky assets ended and the negative trend and the vol-
atility of repo rates in the previous days bounced back, up to normal
levels. In addition, after the announcement, French rates increased
to usual levels. However, it seems that the effect is mainly due to the
activation of swap lines: arrangements to provide foreign currency
liquidity to domestic commercial banks via agreements between Cen-
tral Banks. As in Open Market Operations, Central Banks require the
financial institutions to pledge HQLA as collateral in exchange for
the currency. These measures are designed to tackle market stress
and to alleviate illiquidity in dollar funding markets. In this period,
the Bank of Canada, the Bank of England, the Bank of Japan, the Eu-
ropean Central Bank, the Federal Reserve, and the Swiss National
Bank agreed upon the implementation of standing US dollar liquid-

ity swap lines [fig. 3]. The last spike, which occurred in March 2020,
marked the beginning of the last week prior to the first quarter-end,
which is affected by reporting dates as previously explained. Then,
the unfolding of the crisis drastically revealed the effect of the ECB
communication policy on the sovereign bond cash market and, in
turn, on the repo market.
4 Conclusions
The crisis that resulted from the outbreak of the coronavirus in West-
ern Europe did not only shed light on scarcity issues in the repo mar-
ket but also on the tight nexus between funding and secondary bond
cash markets. It especially highlighted the impact ECB announce-
ments may have. Even though scarcity and market expectations on
the economic outcomes of the health crisis may have significantly
affected repo rates, there is evidence that the tensions originated
from policy announcements may have fuelled the turmoil of March
2020. Instead of alleviating market tensions, the economic outlook
and the statement of the ECB President during the Q&A emphasis-
ing that the “ECB is not there to close spreads” reawakened concerns
regarding the ability of peripheral countries struggling to tackle the
virus to cope with increased debt issuance. The resulting flight to
quality mostly affected core countries. There is also evidence that il-
liquidity in the dollar funding market may have further risen scarci-
ty for the countries more involved in foreign currency transactions,
such as France. Instead, the peripheral countries hit by the pandem-
ic, e.g. Italy, were most negatively affected. As a result, their repo
rates moved persistently out-of-sync with respect to the core coun-
tries. On the contrary, the announcement of expansionary monetary
policies, the PEPP, significantly contributed to calm markets down,
to restore confidence and its normal activity, and the swap lines re-
stored the German bund as the most demanded collateral.
The repo market has a pivotal role in preserving the liquidity of the
money market. The COVID-19 crisis created significant liquidity needs
largely for non-financial firms. While demand for repos increased sub-
stantially during the height of the crisis in February/March due to
flight to quality, dealers’ capacity to intermediate that demand was
relatively constrained. This limited the ability of many firms to access
the repo market which was badly needed to manage intraday liquid-
ity and collaterals. Our analysis highlights the dependence of the re-
po market on central bank interventions in times of stress.

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COVID-19 and Fiscal Policy

in the Euro Area
Filippo Busetto
ICMA Centre, Henley Business School, University of Reading, UK; European Central Bank
Alfonso Dufour
Simone Varotto
Abstract In this chapter we document fiscal policy developments in the main euro
area economies over the last two decades and highlight the dramatic changes triggered
by the COVID-19 pandemic. We analyse how euro area yield curves respond to COVID-19
related expectations of fiscal expansion. We show how fiscal constraints may affect inter-
est rates. Upward pressure on national yields from higher debt levels could compromise
fiscal and financial stability in the long-term.
Keywords Fiscal Policy. Debt. COVID-19. Interest Rates. Sovereign Yields.
Summary 1 Introduction. – 2 Fiscal Policy in the Euro Area. – 3 Interest Rate Dynamics
Before and During the COVID-19 Crisis. – 4 Conclusion.
1 Introduction
The coronavirus pandemic has completely reshaped the current macroeco-

nomic conditions and the economic outlook. According to the European Com-
mission, euro area GDP is expected to shrink, on average, by 7.7% in 2020.
This contraction is far deeper than what was experienced during the Great
Financial Crisis of 2008-09. Furthermore, the average contraction rate masks

ISBN [ebook] 978-88-6969-442-4
Open access 69
DOI 10.30687/978-88-6969-442-4/005
Filippo Busetto, Alfonso Dufour, Simone Varotto
marked cross-country heterogeneity, with countries hardest hit by

the recession, such as Italy, Spain and France, facing a projected
decrease in output of 9.2%, 9.4% and 8.4%, respectively.1 Euro ar-
ea countries have tackled the crisis with an unprecedented fiscal
response. This will increase government budget deficits by sever-
al percentage points and will heavily affect the Debt-to-GDP ratios
over the medium term.2
In this chapter, we show that this fiscal expansion comes at a time
when governments face substantially different financial constraints
across the euro area. Germany, which was the most fiscally conserva-
tive country leading up to the crisis, has plenty of financial resources
to respond to the economic downturn. Instead, other countries, such
as Italy and Spain, did not manage to reduce their outstanding debt
in the last decade, which limits their ability to respond to the crisis.3
We also analyse several euro area yield curves during the pandemic
and explain how they may be linked, at least in part, to expectations
of increased budget deficits.
The effects of fiscal policy on the macroeconomy and on interest
rates have been widely studied in the past.4 One of the main econom-
ic channels linking government bond supply and interest rates is du-
ration risk, as described in Vayanos and Vila (2009). A number of
This paper should not be reported as representing the views of the European Cen-
tral Bank. The views expressed are those of the Authors and do not necessarily re-
flect those of the ECB.
1 Data from European Commission’s spring 2020 forecast can be found at https://
ec.europa.eu/info/business-economy-euro/economic-performance-and-fore-
casts/economic-forecasts/spring-2020-economic-forecast-deep-and-uneven-
recession-uncertain-recovery_it.
2 Examples of newspaper on expected fiscal expansions are: “Germany Tears Up Fis-
cal Rule Book to Counter Coronavirus Pandemic”. Financial Times, 21 March 2020; “It-
aly Boosts Aid Package as Europe Battles Coronavirus Outbreak”. Financial Times,
10 March 2020; “France to Extend Crisis Jobs Scheme for Up to Two Years”. Financial
Times, 8 June 2020.
3 This was also reported in the international press. For example: “Spain’s Tight Budg-
et Puts Squeeze on Coronavirus Response”. Financial Times, 24 June 2020.
4 For example, Corsetti et al. (2013) find that strained public finances might affect
macroeconomic stability by a sovereign-risk channel, which raises funding costs in the
private sector. Bonam and Lukkezen (2019) show that, when government debt is risky,
increased deficits raise interest rates and crowd out consumption. Blanchard (2019)
argues that in the US, as long as interest rates are below growth rates, debt rollovers
may have no fiscal cost. Hatchondo, Roch and Martinez (2012) study how economies
pay a significant default premium in absence of fiscal rules. Laubach (2009) estimates
how debt and deficits affect long-term forward rates in the US. Ghosh et al. (2013) esti-
mate for several countries a debt limit, which serves as an upper threshold for govern-
ment debt that would cause a sovereign default if surpassed. Other relevant work on
fiscal policy and interest rates is for example: Reinhart, Sack, Heaton 2000; Cimadomo,
Claeys, Poplawski-Ribeiro 2016; Arellano et al. 2013; Bi 2012; Jaramillo, Weber 2013;
Kumar, Baldacci 2010; Falagiarda, Gregori 2015.

empirical papers has found a positive relationship between different

measures of bond supply and sovereign yields.5 Other related empir-
ical work has estimated the impact of asset-purchase programmes
(Quantitative Easing) in US and in Europe, which lowered interest
rates by effectively decreasing bond supply in the market through
bond purchases.6
The chapter is structured as follows: section 2 discusses fiscal pol-
icy developments in the euro area. Section 3 illustrates yield curve
movements before and during the pandemic period and describes
the relationship between sovereign yields and fiscal policy. Section
4 concludes.
2 Fiscal Policy in the Euro Area
The fiscal position of the main euro area (EA) countries has been
quite heterogenous in the last fifteen years. In figure 1, we show how
budget deficits and Debt-to-GDP have evolved for Italy, Spain, France
and Germany [fig. 1]. All countries responded to the Great Financial
Crisis with a fiscal expansion, which deteriorated budget deficits and
increased Debt-to-GDP ratios between 2008 and 2011. The situation
stabilised in the last few years, with Italy, Spain and France run-
ning very similar budget deficits – below 3% – from 2016 onwards.
The most fiscally conservative country was Germany, which ran a
budget surplus from 2013 to 2019. This surplus contributed to a sig-
nificant reduction of German Debt-to GDP which shrank by 20 per-
centage points in the last decade. France and Spain currently dis-
play very similar levels of outstanding debt, while Italy is by far the
country showing the worst Debt-to-GDP ratio which reached about
140% in Q4 2019.
With such a high Debt-to-GDP ratio, Italy may soon show signs of
”fiscal fatigue” (Ghosh et al. 2013). Specifically, government debt can
be ultimately repaid in two ways: either with a nominal GDP growth
rate higher than nominal sovereign yields (i.e. a positive GDP growth-
interest rate differential) or by running primary surpluses that will
compensate the interest payments on debt. However, high levels of
debt would need a substantial primary surplus in order to cope with
mounting interest payments and reduce the outstanding amount of
5 See, for example, Greenwood, Vayanos 2014; Billio et al. 2020; Krishnamurthy, Viss-
ing-Jorgensen 2012; Greenwood, Hanson, Vayanos 2015.
6 Some of the papers tackling this effect are for example: D’Amico, King 2013; Gag-
non et al. 2011; Krishnamurthy, Vissing-Jorgensen 2011; Altavilla, Carboni, Motto 2015;
Blattner, Joyce 2016; De Santis, Holm-Hadulla 2017; Li, Wei 2013; Joslin, Priebsch, Sin-
gleton 2014; Eser et al. 2019; Lemke, Werner 2020.

Figure 1 Time series of budget deficit and Debt-to-GDP ratios for the four main EA economies. The upper
panel shows the time-series of budget deficit/surplus for Spain (ES), Italy (IT), France (FR) and Germany (DE)
from January 2006 to December 2019. The bottom panel shows Debt-to-GDP ratios. Source: ECB
Figure 2 Interest rates and nominal GDP growth rates for Spain, Italy, Germany and France. The figure
shows average nominal interest rates and year-on-year nominal GDP growth rates for the largest euro area
economies, Spain (ES), Italy (IT), Germany (DE), France (FR). The average interest rates are calculated as the
mean of 1,5, and 10 year zero-coupon bonds. Source: ECB

Figure 3 Budget deficit forecasts for 2020 and 2021 surveyed before and during the COVID-19 Pandemic.
This figure shows budget deficit survey forecasts for 2020 and 2021 obtained in January 2020 and in April 2020.
Source: Consensus Economics
debt.7 Fiscal fatigue materialises whenever a government’s ability of

increasing the primary balance cannot keep up with the rising debt.
The current low level of interest rates may attenuate this problem if it
persists in the future and is not reversed by a surge in sovereign risk.
In figure 2 we show the relationship between interest rates and
GDP growth for the four countries [fig. 2]. Countries that show a pos-
itive GDP-interest rate differential over time would stabilise debt
even by not running budget surpluses, as the nominal growth rate of
the economy would be higher than the nominal borrowing rates to fi-
nance that growth. In the figure, all countries had a negative differ-
ential during the financial crisis, while it became positive in the sub-
sequent period. However, Italy and Spain had the worst differential
across the entire sample. The Italian differential was positive only
for a few years around 2016 and, compounded with the high level of
debt, suggests a problematic fiscal position for the country.
Entering into 2020, Germany had clearly the highest fiscal flex-
ibility and financial resources to face a macroeconomic downturn,
in contrast with all the other countries that would have struggled
to find resources in case of a deep recession. Then, in response to
the COVID-19 pandemic, euro area countries planned a substantial
fiscal expansion in 2020 and 2021 to counter the economic damage
stemming from nationwide shutdowns. Market expectations of budg-
7 The Government could increase the surplus by raising taxes or by cutting non-in-
terest expenditures.

et deficits have deteriorated consistently since the start of the crisis.

In figure 3 we show how survey forecasts for government budgets
changed from January to April 2020 [fig. 3]. Germany is the country in
which the forecast for current and next year budget deficit changed
the most in absolute terms. Indeed, the country’s budget forecast
changed from an expected surplus to a sizable deficit both in 2020
and in 2021. Moreover, all countries’ forecasts worsened, as all euro
area economies planned a substantial increase in government spend-
ing to boost their economies. These forecasts signal that investors
expect sizable budget deficits going forward, which will substantial-
ly increase future Debt-to-GDP ratios.
In figure 4 we also show the time-series of the cross-sectional vol-
atility of budget deficit survey forecasts [fig. 4]. This variable could be
interpreted as a measure of uncertainty regarding the overall size
of current and future fiscal policy interventions. The spike in the
last data point (April 2020) is unprecedented and is bigger in mag-
nitude than spikes recorded during both the Great Financial Crisis
and sovereign debt crisis. Thus, this figure really shows how uncer-
tain market participants were about the magnitude of the fiscal pol-
icy response by euro area countries to the pandemic. Indeed, neither
the size of such programmes nor to what extent this fiscal expansion
would have been covered by European schemes, such as the Euro-
pean Stability Mechanism or the Recovery Fund, were clear. This
expected fiscal stimulus will then have to be financed by higher is-
suance of sovereign debt, which could put upward pressure on sov-
ereign yields, as investors might request a higher premium to ab-
sorb this higher supply of bonds. Quite likely, the impact on sovereign
yields will vary across countries, with larger yield increases in coun-
tries with higher outstanding debt and sovereign credit risk.
3 Interest Rate Dynamics Before and During

the COVID-19 Crisis
Sovereign bond market yields reflect current and expected macro-

economic conditions. Euro area interest rates have shown signs of
stress during the pandemic period. Between February and May 2020,
as shown in figure 5, the euro area GDP-weighted yield curve has de-
tached itself from the Bund and Overnight Index Swap (OIS) curves,
which are often used as euro area reference curves [fig. 5]. The OIS
is a benchmark risk-free rate and the Bund is the German govern-
ment bond curve. The bottom-left side of the figure shows average
yield curves in the months preceding the COVID-19 pandemic, when
the three curves were in a tighter range. The crisis caused a rela-
tively small shift in the level of the euro area curve across all matur-
ities. In order to put things into perspective, we compare the current
Figure 4 Standard deviation of budget deficit forecasts. This figure shows cross-sectional dispersions
of budget deficit survey forecasts for annual budget surplus/deficit from 2007 to 2020.
The forecasts are for the same year overall budget balance. Source: Consensus Economics
bond market dynamics with the market dynamics before and during
the Sovereign Debt Crisis, as shown in the graphs at the top of fig-
ure 5. The three curves were priced almost equally in the period pre-
ceding the Sovereign Crisis. However, during the worst part of the
downturn, when investors were unsure about the solvency of some
peripheral countries, a shift in the level of the euro area curve sug-
gests a complete repricing across all maturities of the yield curve.
Even though the size of yield movements has been smaller during
the COVID-19 pandemic than during the Sovereign Crisis, the trans-
mission mechanism of these higher perceived risks has had a simi-
lar impact on the level and shape of the euro area curve. In figure 6,
we show the time-series of these three curves at the 10-year matu-
rity [fig. 6]. During the past 15 years, the 10-year euro area yield has
been very close to the Bund and OIS 10-year rates during tranquil
times (before the financial crisis and after the end of the Sovereign
Crisis), while it detached in times of market stress. The bottom pan-
el of the figure shows interest rate movements for the same 10-year
yields in the period surrounding the Pandemic. The spread between
the euro area yield and the Bund/OIS rate increased abruptly be-
tween the end of February and mid-March, when it was unclear what
kind of monetary policy support the European Central Bank would
provide. Then, on March 18, 2020 the ECB announced the Pandem-
ic Emergency Purchase Program (PEPP). The PEPP was announced
as an asset purchase program worth €750 billion, to be initially un-
dertaken by the ECB until the end of 2020. After the announcement,
yield spreads retraced back from their previous maximum.
Figure 5 Average OIS, Bund and EA yields before and during the Sovereign Crisis and the COVID-19 Pandemic.
This figure shows average OIS, Bund and Euro Area yield curves before and during the COVID-19 Pandemic
and the Sovereign Crisis. The Pre-crisis periods are June 2010-December 2010 for the Sovereign Crisis
and September 2019-January 2020 for COVID-19. The crisis periods are June 2011-December 2011 for the
Sovereign Crisis and February 2020-April 2020 for the COVID-19 Pandemic. The Euro Area yield curve is
calculated by a GDP-weighted average of national sovereign yields. Source: Refinitiv, ECB
However, the spread between the euro area 10-year yield and the
Bund/OIS yields remained wider than before the crisis. Estimating
the upward pressure of a fiscal expansion on interest rates during
the COVID-19 crisis is not an easy task. Euro area interest rates have
probably been driven by several different factors during this peri-
od. Further, the PEPP announcement and implementation contribut-
ed to a significant reduction of euro area yields. We tackle this issue
by employing a simple linear model, and by comparing the estimated
yield impact of a fiscal expansion with yield spreads movements dur-
ing the period preceding the PEPP announcement. Specifically, we
focus on the period between the start of February and March 18th.
This is when macroeconomic and fiscal policies had their full impact
on yields, which was softened afterwards by the ECB’s monetary pol-
icy intervention. We calculate the potential impact of a fiscal expan-
sion as follows. First, we run a linear regression model to study the
relationship between 10-year country-level yield spreads over the
OIS rate and expected budget deficits relative to GDP. The sample
period ends in December 2019, so as to exclude any data points from
the current crisis. Second, we use the estimated coefficients from
the model and multiply them by the expected fiscal expansion due
to the COVID-19 crisis. This is calculated as the difference between
the budget deficit forecasts taken in April 2020 and the same fore-
casts obtained in January 2020. Figure 7 reports the results of this
exercise in basis points [fig. 7]. The estimated impact greatly varies
across countries. We estimate that Italy and Spain would have had
Figure 6 Time series of the OIS, Bund and euro area average 10 year yields. The upper panel of this figure
shows time-series of OIS, Bund and euro area yields from January 2006 to May 2020. The bottom panel shows
the same time-series from November 2019 to May 2020. The vertical dashed line in the bottom panel indicates
the date the ECB announced the Pandemic Emergency Purchase Program (PEPP). The euro area 10-year yield
is calculated by a GDP-weighted average of national sovereign yields. Source: Refinitiv, ECB
the most sizable yield increases, with 160 and 90 basis points, re-
spectively. Germany and France show a much smaller impact instead,
with magnitudes of around 40 basis points for both. The main take-
away from the exercise is that the estimated yield change would be
non-negligible especially for peripheral countries.
How does this empirical evidence square with actual yields ob-
served in the market? As mentioned before, we want to focus on the
period preceding the PEPP announcement to reduce the confounding
effect of the ECB’s monetary policy on yields. We can use this pre-
announcement period as a benchmark for yield changes that would
happen, at least partially, without a clear monetary policy support.
Figure 8 shows 10-year country-level yield spreads over the OIS from
February to May 2020 [fig. 8]. Countries with the highest estimated
impact from our model also had the greatest yield movements in this
period. Examining the period from the beginning of February to the
18th of March, yield spreads increased by about 125 basis points for
Italy, 75 basis points for Spain, 30 basis points for France and re-
mained unchanged for Germany. Except for Germany, the magnitudes
are not so far off from our estimated impacts.
Indeed, German Bunds were largely unaffected by the crisis, with
yields remaining stable during this period. So, the expected large fis-
cal expansion in Germany did not have any effect on German yields,
which is at odds with what observed in other countries. However,
in our model we do not control other factors that might have driv-
en yields during the pandemic, such as flight-to-safety effects. Spe-
Figure 7 Estimated impact of budget deficit shocks during the pandemic on yield spreads. This figure
shows the estimated impact in basis points on euro area yield spreads of a shock on expected country-level
budget deficits. The magnitudes are obtained as follows: 10-year country-level yield spreads over OIS are
linearly projected onto expected budget deficit forecasts. Regression residuals are assumed to follow an
AR(1) process. Further, the coefficients obtained by the regression are multiplied by a fiscal shock, which is
calculated by looking at the difference between budget deficit forecasts obtained in December 2019 (pre-
pandemic) and in April 2020 (pandemic period). Source: ECB, Consensus Economics, Author’s calculations
Figure 8 Country-level spreads over OIS between February and April 2020.
This figure shows time-series of 10-year country-level yield over the 10-year OIS rate. Source: Refinitiv, ECB
cifically, the German Bund is widely considered a safe-haven asset.

As a result its yield could experience downward pressure in times of
high risk aversion. Thus, it is possible that the expected bond supply
expansion by the German government was compensated by a higher
demand for Bunds during the pandemic.

4 Conclusion
In this chapter, we describe the fiscal adjustments made by the main

Euro area countries following the onset of the COVID-19 pandemic.
Such countries planned a robust expansionary fiscal response af-
ter nationwide shutdowns caused a massive economic downturn. We
consider the effect of deteriorating expectations of budget deficits on
government bond yields during the pandemic period. From a policy-
making perspective, it is important to assess how fiscal constraints
during expansionary fiscal interventions might affect interest rates,
as upward pressure on national yields from higher debt might com-
promise fiscal and financial stability in the long-term.
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Part 3
Banking, Risk and Regulation
83
The Effects of the COVID-19

Pandemic Through the Lens
of the CDS Spreads
Alin Marius Andrieș
“Alexandru Ioan Cuza” University of Iași; Institute for Economic Forecasting; Romanian
Academy, Romania
Steven Ongena
University of Zurich; Swiss Finance Institute; KU Leuven and CEPR
Nicu Sprincean
“Alexandru Ioan Cuza” University of Iași, Romania
Abstract In this paper we are analysing the impact of the general lockdown meas-
ures imposed in Italy in the context of the COVID-19 pandemic on European banks’ CDS
spreads. Compared to the impact of the COVID-19 pandemic on sovereign risk, we find
little evidence of increased bank risk following the event. However, investors’ reaction
was clearly negative in longer time frames. In addition, we quantify the feedback loop be-
tween sovereign and bank risk and document an increased interconnectedness between
sovereigns and banks during the current health crisis, however with a smaller magnitude
comparing to the sovereign debt crisis. Banks are now more resilient to shocks, being a
direct consequence of the post-crisis regulatory framework.
Keywords COVID-19 pandemic. Bank risk. Country risk. Spillover effects.
Summary 1 Introduction. – 2 Related literature. – 3 Methodological aspects. – 4 Results

and discussion. – 5 Conclusion.

ISBN [ebook] 978-88-6969-442-4
Open access 85
DOI 10.30687/978-88-6969-442-4/006
Alin Marius Andrieș, Stevan Ongena, Nicu Sprincean
The Effects of the COVID-19 Pandemic Through the Lens of the CDS Spreads
1 Introduction
The outbreak of the novel coronavirus, i.e. the SARS-CoV-2 and the
disease it causes, i.e. the COVID-19, is a rare disaster that has affect-
ed the world economy in an unprecedented way. The severity of this
global health crisis, which was declared a pandemic by the World
Health Organization (WHO) on March 11, 2020, has been compared
with that of the Great Influenza (Spanish Flu) from 1918-19 with up
to 50 million worldwide fatalities (Boissay, Rungcharoenkitkul, 2020).
At the time of writing, the total number of confirmed cases with COV-
ID-19 is almost nine millions, whereas the global death toll is near
500,000 according to Johns Hopkins University.
Against the backdrop of highly globalised economies and integrat-
ed cross-border supply chains, the lockdown measures imposed in the
majority of countries and the containment measures adopted to limit
the spread of the virus have brought the global economy to a sudden
stop, making this crisis truly different. Eichenbaum, Rebelo and Tra-
bandt (2020) note that pandemics depress the real economy through
a reduction in both supply and demand. As a consequence, govern-
ments around the world have stepped in with a mix of health, fis-
cal, monetary, macroprudential, microprudential and market-based
stimuli in order to help households and businesses to have a quick
recovery.1 However, in the short run, these measures tend to boost
the risk aversion of investors in government bonds, who are worried
about the reduced fiscal capacity of countries that are too indebted
(Andrieș, Ongena, Sprincean 2020).
We extend the analysis on European sovereign CDS spreads con-
ducted in Andrieș, Ongena, Sprincean (2020) to European banks’
CDS spreads, focusing on the sovereign-banks feedback loop dur-
ing the global financial crisis from 2007-09, sovereign debt crisis in
Europe (2010-13), and the current health crisis. We find that inves-
tors’ reaction to the general lockdown measures imposed in Italy on
March 9, 2020, which corresponds to the arrival of the pandemic in
Europe, quantified through the abnormal performance of Europe-
an banks’ CDS spreads, is less pronounced than in the case of sov-
ereign CDS spreads. However, on a longer time frame their concern
increases. Our findings suggest that the spillover effects from sov-
1 See the IMF Policy Tracker (https://www.imf.org/en/Topics/imf-and-covid19/

Policy-Responses-to-COVID-19) and the Global Policy Tracker from the Harvard Busi-
ness School (https://www.hbs.edu/covid-19-business-impact/Insights/Econom-
ic-and-Financial-Impacts/Global-Policy-Tracker). From March to May 2020, the
largest fiscal stimulus in Europe as a percent of 2018 GDP was implemented by Italy
(25.15%), followed by Denmark (11.94%), Belgium (11.40%) and Switzerland (10.75%). On
average, the fiscal announcements as a share of GDP for developed economies (6.66%)
are twice as high as those announced by developing countries (3.64%).

ereigns to banks and vice versa, amplified following the COVID-19

shock. But their magnitude is smaller compared to other recent cri-
sis episodes. This is the result of the solid position of the banks and
their improved capacity to absorb losses due to stricter capital and
liquidity regulation following the financial crisis of 2007-09.
2 Related Literature
European banks present specific features that substantially differ-

entiate them from the US ones. If the latter recovered to the pre-cri-
sis profitability level by 2013, the European banks still struggle to
reach that level. This aspect is primarily explained by three factors
(Carletti et al. 2020): (i) the European sovereign debt crisis which
impacted severely especially the banks in peripheral countries (the
GIIPS countries, i.e. Greece, Italy, Ireland, Portugal and Spain); (ii)
the high level of non-performing loans: in the US, early government
intervention helped banks to clear their balance sheets; and (iii) the
macroeconomic environment: strong fiscal stimulus in the US com-
pared to a sober approach (austerity measures) in Europe. Moreover,
Europe’s financial structure has become strongly bank-based, mak-
ing it more prone to systemic risk (Langfield, Pagano 2016).
The nexus between the risk profile of banks and countries has been
addressed in various studies, and is mainly attributed to four chan-
nels that interact with each other: (i) the sovereign exposure chan-
nel; (ii) the safety net channel; (iii) the collateral channel; and (iv) the
sovereign downgrade channel (BIS 2011; De Bruyckere et al. 2013;
Dell’Ariccia et al. 2018). Banks hold in their balance sheets a signifi-
cant amount of public debt, averaging 30% in developed markets and
45% in emerging markets (Arslanalp, Tsuda 2014). According to Ba-
sel Accords, banks have to maintain capital buffers with regulatory
risk weights that depend on their asset exposures. However, European
banks do not hold capital against their European debt exposures, i.e.
they have zero-risk weight (Keddad, Schalck 2020). As a consequence,
European banks are undercapitalized if a negative shock hits countries
and sovereign risk increases (Kirschenmann, Korte, Steffen 2019). In
empirical analyses sovereign risk is found to influence banks’ risk, es-
pecially in the context of the global financial crisis and sovereign debt
crisis in Europe (Alter, Schüler 2012; De Bruyckere et al. 2013; Gib-
son, Hall, Tavlas 2016; Keddad, Schalck 2020).
The second transmission channel, the safety net channel, reflects
the explicit and implicit guarantees provided by governments and
central banks, especially for too-big-to-fail financial institutions, to
support financial stability. When the fiscal position of countries wors-
ens, the value of public guarantees to the banking system reduc-
es, resulting in spillover effects from sovereign to bank risk (Alter,
Schüler 2012; Bertay, Demirgüç-Kunt, Huizinga 2013; Avino, Cotter

2014). In the same vein, banking crises activate backstops, guaran-
tees and other resolution policies that affect public finance sustain-
ability, resulting in spillover effects from bank to sovereign risk (Yu,
2017; Dell’Ariccia et al. 2018).
The third transmission channel is the collateral channel that op-
erates against the backdrop of the reduced value of collateral that
banks hold in the form of sovereign debt, affecting borrowing costs
of banks in the interbank market, private repo markets and oth-
er types of transactions (BIS 2011; Correa et al. 2012; De Bruyck-
ere et al. 2013). Finally, the last channel deals with sovereign rating
downgrades that can affect banks’ borrowing capacity, leading to
the downgrade of domestic banks. These channels have been inves-
tigated, among others, by Arezki, Candelon, Sy (2011) and Gibson,
Hall, Tavlas (2016). The latter (2016) document that during the sov-
ereign debt crisis in Europe the decline in commercial banks’ equi-
ty prices reflected direct and indirect linkages with the sovereigns.
Dell’Ariccia et al. (2018) also mention the macroeconomic channel,
i.e. the three-sided relationship between banks and government sec-
tor and real economic activity.
3 Methodological Aspects
We extend the analysis of Andrieș, Ongena, Sprincean (2020) to

the European banking sector, investigating the impact of the COV-
ID-19 pandemic on banks’ CDS spreads. Similarly to Andrieș, Onge-
na, Sprincean (2020), we employ an event study methodology to as-
sess the reaction of investors in bank bonds to: (1) general lockdown
measures imposed in Italy on March 9, 2020; (2) the pandemic in-
tensity (the country specific day when the number of cases totalled
100, the growth rate climbed to 30 cases a day, and the death rate
surpassed 10); (3) and some dates related to the stringency of the
containment measures, such as restrictions on internal movement
and general workplace closing. Further, we measure spillover effects
from sovereigns to banks and vice versa during three crisis periods:
(i) the global financial crisis of 2007-09; (ii) the euro area debt crisis
of 2010-13; and (iii) the current health crisis, comparing their mag-
nitude across and within groups. We follow the approach of Billio et
al. (2012) and analyse the interdependencies between sovereigns
and banks through Granger-causality networks. For banks from the
same countries, we construct equally-weighted CDS indices. We use
the 5-years CDS contracts denominated in Euro with modified-mod-
ified restructuring, written on senior obligations. The source of the
data is Thomson Reuters DataStream.

4 Results and Discussion
Figure 1 exhibits the evolution of sovereign CDS spreads and banks’

equally-weighted CDS indices for four European countries that have
been heavily affected by the pandemic (Italy, Germany, France and
Spain), over the January 1-April 20, 2020 period [fig. 1]. The vertical
lines from each graph represent our main event date, i.e. March 9,
2020. We can note that, with the exception of Germany, all sover-
eign CDS quotes increased following the announcement of gener-
al lockdown measures imposed in Italy. The same is true for banks’
CDS spreads, including German banks. Thus, investors reacted to
this announcement by requiring higher premia to invest in bonds
issued by these European sovereigns or by the banks headquar-
tered in these countries.
Figure 1 The evolution of sovereign CDS spreads and banks’ CDS spreads (equally-weighted indices)
for Italy, Germany, France and Spain from January 1, 2020 to April 20, 2020 (in basis points).
Note: the vertical lines represent March 9, 2020
Next, we present the findings from the event study with March 9,
2020 as the main event date table 1.2 The event study is conducted
over the event windows: [0; 0], [-1; 1], [-5; 5], and [0; 30] days. Thus,
we analyse the market reaction for short and longer time frames. The
results show little evidence in favour of a negative reaction of inves-
2 See Table A1 from the Annexes with the list of the banks used in our analysis.

tors in bonds issued by European banks on the event day, quantified

through an increase in cumulative average abnormal change (CAAC)3
of CDS spreads by 94.22 basis points only. Only one test out of four
(generalised sign test) shows statistical significance of CAACs on the
event day. The findings for sovereign CDS spreads, however, indicate
a clear negative effect on March 9, 2020 of 503.85 basis points boost
in CAAC. Thus, the market reaction is more pronounced in the case
of sovereign risk than bank risk. However, the harmful effect of con-
tainment measures to curtail the spread of the virus is present for
banks over longer periods, especially for [-5; 5] days event window
with an increase in CAAC by 4787.67 basis points, being highly sta-
tistically significant.
In terms of pandemic intensity, unreported results show that the
highest risk from investors’ in both sovereign and bank bonds is as-
sociated with a rapid increase in daily confirmed cases (i.e. 30 cases
a day), whereas the general restrictions on internal movement worry
more investors in bank bonds than those in sovereign bonds. None-
theless, according to investors in European sovereign debt the eco-
nomic channel of non-pharmaceutical interventions4 dominates that
of coordination where people purposely reduce their consumption
and labour supply to reduce the spread of the virus and the risks as-
sociated with the pandemic (Correia, Luck, Verner 2020).
3 Cumulative average abnormal change for CDS spreads is the analogue of cumulative
average abnormal return (CAAR) from equity prices. We compute the change in CDS
spreads as the natural logarithm of CDS quote at time t over CDS quote at time t-1. In
event studies, the abnormal return (AR) is the difference between the actual and the ex-
pected return, the latter being calculated based on specific models. The AR can be aver-
aged across all firms in the sample to get the average abnormal return (AAR) for each t.
In the end, one can sum the AARs over specific time intervals to get the cumulative av-
erage abnormal return, which can capture the aggregate effect of the abnormal returns.
4 Strategies carried out by people and communities to limit the spread of the virus,
besides vaccination and medical treatment (pharmaceutical interventions), such as so-
cial distancing and public hygiene.

Table 1 Banks’ CDS spreads reaction to the general quarantine measures imposed in Italy
CDS CAACs 9 March 2020 (b.p.)

Event window [0; 0] [-1; 1] [-5; 5] [0; 30]
29 European banks 94.22 2176.44 4787.67 3853.68

Significance tests
Adjusted-Patell test 1.07 8.13*** 10.09*** 12.87***
BMP test 1.33 7.10*** 8.40*** 8.74***
Generalised sign test -2.87*** 3.46** 3.84*** 4.21***
GRANK test -0.57 2.36** 2.61** 2.83***
Note: this table exhibits the cumulative average abnormal changes (CAACs) in basis
points of European banks’ CDS spreads considering the following event windows: [0;
0], [-1; 1], [-5; 5], and [0; 30] days. The event refers to March 9, 2020. The estimation
window is 250 days and the model employed to compute the expected change is the
market model with DataStream Banks Europe 5Y CDS index as the market index (see
Andrieș, Ongena, Sprincean 2020 for details). The table also reports the statistics of
the tests used to assess the significance of CAACs: two parametric tests (Adjusted
Patell and BMP tests) and two non-parametric tests (Generalised sign and GRANK
tests). ** and *** denote statistical significance at the 5% and 1% level, respectively.
Further, we quantify the dynamic interconnectedness between sover-

eigns and banks in a Granger-causality framework. Considering our
data, changes in sovereigns’ CDS quotes can Granger-cause chang-
es in banks’ CDS spreads if information contained in the past values
of sovereigns’ CDS and in the past values of banks’ CDS is better at
predicting the value of banks’ change in CDS than the information
based only on the past values of banks’ change in CDS (for details,
see Andrieș et al. 2020). Following Billio et al. (2012) we compute the
Dynamic Causality Index (DCI) which is based on Granger-causality
relationships. An increase in the Dynamic Causality Index is associat-
ed with enhanced spillover effects between sovereign and bank risk.
Being constrained by the availability of data, our analysis starts on
November 10, 2008. From figure 2, which depicts the evolution of the
DCI index over time, we can note three spikes: two during the sover-
eign debt crisis, and one during the current health crisis [fig. 2]. The
highest magnitude of the Dynamic Causality Index is reached during
the European sovereign debt crisis indicating an increased feedback
loop between sovereign and bank risk. The DCI is constantly rais-
ing during the global financial crisis. However we do not capture the
Lehman Brothers event. Contrary to the Great Recession and sover-
eign debt crisis episodes, now banks are more resilient to shocks, be-
ing better equipped with capital and liquidity buffers and have low-
er incentives of excessive risk-taking as a direct consequence of the
post-crisis regulatory environment. However, due to disruptions in
Figure 2 The evolution of Dynamic Causality Index over the November 10, 2008-April 20, 2020 period
the global supply chains and reduction in demand caused by the lock-
down measures, banks could rapidly face a surge in non-perform-
ing loans amplified by the default of firms, notably small and medi-
um-sized enterprises that depend on bank funding as their primary
source of borrowing.5 Carletti et al. (2020) point-out four challenges
that banks’ business models will face in the post-COVID-19 era: (i) a
prolonged period of low interest rates; (ii) increased credit risk; (iii)
digitalisation; and (iv) stricter bank regulations.
Based on pairwise Granger-causality relationships between sov-
ereigns and banks one can construct the Granger-causality network,
being defined as a set of nodes (sovereigns and banks) connected by
edges. If changes in sovereign i’s CDS spreads Granger-cause chang-
es in bank j’s CDS quote, than these two nodes will be connected by
a straight line with the arrow coming from sovereign i. Otherwise,
there will be no connection. The arrow can also come from bank j to
sovereign i if changes in bank j’s CDS spreads Granger-cause chang-
es in sovereign i’s CDS quote. Unreported results show that link-
ages within groups (sovereign-sovereign and bank-bank) are more
pronounced than linkages across groups (sovereign-bank and bank-
5 The main macroprudential measures adopted at the European level to mitigate the
negative effects of COVID-19 pandemic and avoid a credit crunch consist of relaxation
of regulatory capital buffers, such as capital conservation buffer, countercyclical capi-
tal buffer, and systemic risk buffer. For more details, see the database from the ESRB:
https://www.esrb.europa.eu/home/coronavirus/html/index.en.html.

sovereign), and the Italian banks are the most exposed to shocks that
propagate through the network.
5 Conclusion
The COVID-19 pandemic is a rare disaster that has affected the glob-
al economy in an unprecedented way. Governments around the world
have stepped in by making use of health, fiscal, microprudential,
macroprudential, monetary, or marked-based measures in order to
mitigate the negative effects of the health crisis and to avoid a cred-
it crunch in the banking sector. We analyze the impact of the general
lockdown measures imposed in Italy in the context of the COVID-19
pandemic on European banks’ CDS spreads. Compared to sover-
eign risk, we find little evidence of increased bank risk following
the event, which also corresponds to the commencement of the pan-
demic in Europe. However, investors’ reaction was clearly negative
in longer time frames. In addition, we quantify the feedback loop be-
tween sovereign and bank risk and document an increased intercon-
nectedness between sovereigns and banks during the current health
crisis, but with a smaller magnitude as compared to the sovereign
debt crisis in Europe. Banks are now more resilient to shocks, be-
ing better equipped with capital and liquidity buffers and have low-
er incentives to excessive risk-taking as a direct consequence of the
post-crisis regulatory framework.
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Table A1
List of the banks used in the analysis
Nr. crt. Name of the bank Country of origin

1 ERSTE GROUP BANK AG Austria
2 BAWAG PSK Austria
3 DANSKE BANK A/S Denmark
4 BNP PARIBAS SA France
5 SOCIETE GENERALE France
6 CREDIT AGRICOLE SA France
7 DEUTSCHE BANK AG Germany
8 BAYERISCHE LANDESBANK Germany
9 COMMERZBANK AG Germany
10 LANDESBANK BADEN-WÜRTTEMBERG Germany
11 IKB DEUTSCHE INDUSTRIEBANK AG Germany
12 LANDESBANK HESSEN-THÜRINGEN Germany
GIROZENTRALE
13 ALLIED IRISH BANKS Ireland
14 UNICREDITO ITALIANO SPA Italy
15 MEDIOBANCA SPA Italy
16 BANCO COMERCIAL PORTUGUES SA Portugal
17 BANKINTER SA Spain
18 BANCO DE SABADELL Spain
19 BBV ARGENTARIA SA Spain
20 CAJA DE AHORROS DEL MEDITERRÁNEO Spain
21 SVENSKA HANDELSBANKEN AB Sweden
22 SWEDBANK AB Sweden
23 SKANDINAVISKA ENSKILDA BANKEN AB Sweden
24 CREDIT SUISSE GROUP Switzerland
25 UBS AG Switzerland
26 LLOYDS BANK United Kingdom
27 BARCLAYS BANK PLC United Kingdom
28 THE RBS GROUP PLC United Kingdom
29 HSBC BANK PLC United Kingdom

Market Risk Measurement

Preliminary Lessons
from the COVID-19 Crisis
Emese Lazar
Ning Zhang
Abstract This chapter presents a preliminary analysis on how some market risk meas-
ures dramatically increased during the COVID-19 pandemic, with measures computed
over longer horizons experiencing more pronounced effects. We provide examples when
regulatory market risk measurement proved to be suboptimal, overestimating risk. A fur-
ther issue was the large number of Value-at-Risk ‘exceptions’ during the first few months
of the crisis, which normally leads to overinflated bank capital requirements. The current
regulatory framework should address these problems by suggesting improvements to
the calculation of risk measures and/or by modifying the rules which determine capital
requirements to make them appropriate and realistic in crisis situations.
Keywords Market risk. Measurement. Value-at-Risk. Expected Shortfall. Regulation. Basel.
Summary 1 Introduction. – 2 Overview of the Market Risk Regulation Before the Crisis.
– 3 Market Risk Measurement Over the First Five Months of the Crisis. – 4 Challenges to
the Regulatory Framework. – 5 Looking Ahead. – 6 Conclusions.

ISBN [ebook] 978-88-6969-442-4
Open access 97
DOI 10.30687/978-88-6969-442-4/007
Emese Lazar, Ning Zhang
Market Risk Measurement. Preliminary Lessons from the COVID-19 Crisis
1 Introduction
The coronavirus pandemic has been one of the most devastating

global crises since the Second World War. It has had far-reaching
consequences that affected all countries to varying degrees. The
most tragic impact has been the loss of lives, but also job losses, the
lack of healthcare access and the effects on mental health etc. have
been devastating. The outcome of the pandemic in the financial sec-
tor has been a financial crisis, named the COVID-19 crisis. Ramel-
li and Wagner (2020; forthcoming) compare stock performances by
industry as early effects of the crisis, and identify the Energy sector
as being the worst hit whilst Telecom, Pharma & Biotech reaping the
largest gains. Acharya and Steffen (2020) highlight how stock perfor-
mance depended on liquidity as stocks with high liquidity performed
better. Aldasoro et al. (2020) raise concerns about the long-terms
prospects of banks, as the banking sector has been more severely
hit than most sectors, and argue that the consequences are compa-
rable with the outcomes of the 2008 global financial crisis.
Here we investigate how financial risks increased and how the
crisis affected financial institutions, with a focus on market risk
measurement, and we discuss the challenges faced by regulators.
We examine the first five months of the crisis, analysing the effects
of equity market index risk factors, and to some extent commodity
risk factors, as these are the risk dimensions most affected by the
COVID-19 crisis. Other risk factors indicated serious levels of mar-
ket stress. Examples include government bond yields, which reached
historical lows, and volatility risk factors, such as the CBOE VIX in-
dex, which had its largest shocks, both positive and negative and
reached its highest value ever of 82.69 in March 2020, as illustrat-
ed in figure 1 [fig. 1]. At the time of writing the crisis is still affecting
the economies worldwide as well as the day-to-day lives of millions.
2 Overview of the Market Risk Regulation Before the Crisis
Market risk refers to the risk of losses arising from adverse movements
in market prices of assets. From a regulatory perspective, the Basel
Committee on Banking Supervision (1996) first introduced market risk
capital reserves against unexpected asset price movements in the trad-
ing books of banks. Since then, Value-at-Risk (VaR) has become the
dominating measure of market risk, which financial institutions and
regulators use to make risk-informed decisions and to calculate mar-
ket risk capital requirements. VaR is defined as the potential loss one
may face over a given time horizon with a pre-defined confidence level.
For example, if the 99% 10-day VaR is $1 million, there is 99% chance
that the losses will not exceed $1 million over the next 10 trading days.
Figure 1 CBOE volatility index from 2000-01-23 to 2020-06-23
In the aftermath of the 2008 global financial crisis, the flaws of mar-
ket risk regulation have become evident. For instance, the VaR-based
risk assessment has been found to underestimate the risks in tur-
bulent markets. To address these problems, the Basel Committee on
Banking Supervision (2019) published revisions to its global regula-
tory standards that include a move from Value-at-Risk to Expected
Shortfall (ES). ES measures the average loss beyond the VaR thresh-
old in the tail of the loss distribution, producing more accurate gaug-
es of tail risk. The typical confidence level is 99% for VaR and 97.5%
for ES, corresponding to the 1% and 2.5% worst-case losses, respec-
tively. Moreover, considering the liquidity of various assets, vary-
ing time horizons are used to evaluate financial risks, i.e. 10 days
for large cap equities, 20 days for small cap, and up to 120 days for
some risk categories. However, the latest regulations stipulate that
these risk calculations are based on overlapping 10-day returns and
we discuss this procedure in our risk assessments.
Figure 2 shows the 10-day 97.5% ES1 calculated using the most
widely accepted risk model in the industry, Historical Simulation (de-
noted by HS in the following), based on the S&P 500 index returns
(2000-06-26/2020-06-23), and plots it along the index [fig. 2]. Within
one week during March 2020, the index was hit by a shock of around
-19% cumulative return. As the figure shows, during the global finan-
1 Throughout this chapter, ES is expressed in returns, of which the value is nonneg-

ative; a rolling window scheme is used to estimate ES with a window length of 250
trading days.

Figure 2 10-day Historical Simulation ES at 97.5%,

based on S&P 500 index returns from 2000-06-26 to 2020-06-23
cial crisis between mid 2007 and early 2009, as well as during the
sovereign debt crisis which peaked between 2010 and 2012, the risk
measure, ES, peaked. The same can be seen during the crisis wrought
by the coronavirus pandemic, with ES reaching a level comparable
with the ES during the financial crisis, as also discussed in Capelle-
Blancard and Desroziers (2020). It is to be noticed that the ES dur-
ing the crisis increased to multiple times the level before the crisis.
Though the first cases of COVID-19 date back to December 2019,
the lockdown in China occurred on January 23, 2020. Following this,
the virus spread quickly over other parts of the globe and a global
pandemic was declared by the WHO on March 11, 2020.2 On seeing
the widespread effects of the coronavirus outbreak on the economy
and the banks, prudential authorities as well as local jurisdictions
decided to delay the implementation of the latest version of market
risk regulatory framework (Basel Committee on Banking Supervision
2019), called the Fundamental Review of the Trading Book (FRTB),
until January 2023. This gives regulators time to consider suitable
changes to market risk measurement and management in the new Ba-
sel framework, if required. It also gives financial institutions breath-
ing space to reevaluate their market risk estimation methodologies
as well as the steps needed to be taken to reduce risk exposures to
an acceptable level. Also, risk estimates such as VaR and ES depend
2 More information about how this global event unfolded and a detailed timeline can
be found in https://www.who.int/news-room/detail/27-04-2020-who-timeline-
--covid-19.

on the modelling framework, and in the following we examine this

dependence in more detail.
3 Market Risk Measurement Over the First Five Months

of the Crisis
For regulatory purposes and for internal risk assessment of institu-

tions, the estimation of VaR and ES measures over a given time pe-
riod is of interest, since market risk capital calculations are based
on risk assessments. Here we focus on the estimation of ES as it is a
central element of the recent regulations. To illustrate the dramat-
ic increase in risk witnessed in the first half of 2020,3 figure 3 pre-
sents the level of 97.5% ES risk over 10 days, for two assets: FTSE
100 index returns as well as Europe Brent Crude Oil Spot returns,
based on two methods: Historical Simulation, computed using over-
lapping 10-day returns, as well as the well-known GARCH(1,1) mod-
el that assumes normally distributed returns. For the GARCH model,
the h-day ES is calculated based on the daily ES estimates, written
as , which is called the ‘square root of time’
rule [fig. 3].
Figure 3 10-day HS ES and GARCH ES at 97.5% for FTSE 100 and oil returns
The first thing to notice from figure 3 is that the general level of ES
risk computed using HS increases dramatically during March 2020,
by a multiplier of more than 4 for the FTSE index, and by a multipli-
er of more than 5 for the risk computed from oil returns. Also, the ES
stays at this level until the end of the sample period, unaffected by the
3 Similarly, Ibikunle and Rzayev (2020) show a substantial increase of a cross-section-

al average volatility for 110 European stocks from 24 Jan. to 24 March in their figure 1.

events during this period. If these values are used for capital calcu-
lation, the required capital would also increase multiple times, with
many financial institutions not being able to meet these increased
capital requirements.4 To address this, banks across the world are
allowed to temporarily suspend the new capital calculation method
against the radically increased risk, as discussed by Borio and Restoy
(2020). Moreover, the GARCH model does a good job in terms of the
speed of reaction to large negative returns, but it leads to risk es-
timates increasing dramatically, by a multiplier of more than 10, as
can be seen in figure 3 for the FTSE returns, which would give capi-
tal requirements that are impossible to meet, reaching levels of more
than 10 times the pre-crisis levels. Followed by this initial sharp rise
in risk, the risk level estimated by GARCH decreases back within a
month, and in the second part of the sample period it is below the
risk level estimated by the HS method.
For oil returns, the risk estimate obtained by GARCH displays a
large variation. After the initial sharp rise in risk at the beginning
of March, on April 20 the market experienced its deepest fall in the
price of a barrel of West Texas Intermediate (WTI), the benchmark for
US oil, even leading to negative prices for this commodity – caused by
an abrupt drop in demand. This aroused investors’ fears and created
a turbulent oil market, as evidenced by the predictions of GARCH ES
of oil returns, with the ES risk reaching levels more than 15 times
higher than the level in January 2020. This shows the high depend-
ence of GARCH risk estimates on returns; although the model is quick
to react to events, due to the high level of risk estimates it is less suit-
able to be used for capital calculations. These risk estimates high-
light the severity of the COVID-19 financial crisis, especially after
the coronavirus pandemic was declared in March 2020.
To illustrate the effects of the COVID-19 crisis on the global fi-
nancial markets, we consider the market indices S&P 500 (spx), FT-
SE 100 (ftse), DAX (dax), Nikkei 225 (nky), and Shanghai Composite
(sse), as well as several commodities including Europe Brent Crude
Oil Spot prices (oil), Henry Hub Natural Gas Spot Prices (gas), Lon-
don PM fix gold prices (gold), Copper Jul 20 futures contract (cop-
per), as well as the Sugar #11 Oct 20 futures contract (sugar), from
January 2019 to June 2020. Figure 4 shows the multipliers for His-
torical Simulation ES, calculated as the ratio of the average ES over
the last five trading days of the sample period, ending with June 23,
2020, and the average ES over the first five trading days starting
with January 23, 2020 [fig. 4]. We use three different time horizons (1
4 More measures are taken by governments and banks to alleviate the adverse finan-
cial and economic effects of the COVID-19 crisis, as suggested by Basel Committee on
Banking Supervision (2020).

Figure 4 Multipliers for HS ES at 97.5% over 1, 10 and 20 days across various assets,
calculated as the ratio of the average ES over the last five trading days of the sample period
divided by the average ES over the first five trading days of our sample
day, 10 days and 20 days) to compute the risk estimates and the mul-
tipliers. For some assets the multipliers take large values: index re-
turns and oil returns, most noticeably. For the S&P 500, FTSE, DAX
and Nikkei 225 index returns, the increase in the risk level shows
a similar pattern: the risk increased by 3 to 6 times, depending on
the risk horizon. For the Shanghai Composite index, the value of the
multiplier is less than one, showing that this index didn’t display an
increase in the level of ES risk estimates. The gas market seems un-
affected as well in terms of risk estimates. The other commodities
considered – gold, copper and sugar – show an increase in the risk
level by about twofold, whilst the risk estimates obtained from oil re-
turns increased dramatically during the crisis.
It is interesting to note the dependency of the multiplier on the
risk horizon: for most assets considered, the multiplier for the 1-day
risk horizon is smaller than the multiplier for the 10-day horizon, and
the multiplier for the 20-day horizon is the largest. If the ‘square root
of time’ rule was valid, then these multipliers should have been at
the same level, regardless of the time horizon. However, this is not
the case, which highlights that longer horizon risks were affected by
the COVID-19 crisis more than short horizon risks, with some of the
risk estimates going up sixfold over the sample period. This pattern
is not followed by all asset classes, but it seems to be a typical be-
haviour of risk estimates for the majority of assets considered here.

Figure 5 Comparison of three approaches to compute 97.5% HS ES over 40 trading days, based on FTSE 100
4 Challenges to the Regulatory Framework
In the following we consider the current Basel framework for mar-

ket risk calculations, with a focus on the risk horizons considered
in these assessments. As specified by the regulation, different risk
horizons are applied to different categories of risk factors, ranging
from 10 days for the most liquid asset classes and up to 120 days for
some risk factor categories. Under the current framework, these cal-
culations are based on 10-day ES assessments, and then the ‘square
root of time’ rule is used to compute risk over longer horizons, writ-
ten as The question we are asking here is
whether this approximation was proved to be correct or not during
the recent crisis.
Figure 5 investigates three different approaches to estimate ES of
an individual asset,5 the FTSE 100 index, over h days: 1) in the first
approach, the h-day ES is calculated based on the daily ES using the
‘square root of time’ rule, so ; 2) in the second
approach, we follow the FRTB recommendations and calculate the
h-day ES from the 10-day ES estimates (computed from overlapping
observations) as , hereafter referred to as
the regulatory ES; 3) in the third approach we directly use the h-day
overlapping observations to get h-day ES [fig. 5]. We focus on the cal-
culation of 40-day ES (h = 40) at 97.5% level, considering the above
5 For simplicity, we illustrate the calculation of ES where only one risk factor is con-
sidered.

Figure 6 Time-varying number of VaR exceptions (the daily returns being

below the negative of the daily HS VaR at 99%) over a 250 trading day backtesting period
three approaches with the estimates displayed in figure 5. It is to

be noted that the regulatory ES (as shown using a red line) overes-
timates the actual risk (as shown by the yellow line), whilst the ap-
proach based on the simple ‘square root of time’ rule computed from
daily ES estimates (as shown by the blue line) gives a better fit. This
pattern, which we noticed for other asset classes and for other risk
horizons as well, suggests that regulatory capital might overesti-
mate risk in such cases.
Whilst market risk measurement has moved from VaR to ES, back-
testing ES is a debating area and the current regulation stipulates
VaR backtesting only. As such, the focus is on counting the number of
daily VaR exceptions (cases when the daily return is below the nega-
tive of daily VaR estimate) over a period of 250 days. Coloured zones
are considered, with the green zone applying if the number of excep-
tions is less than or equal with 5, amber zone when the number of ex-
ceptions is more than 10, and yellow zone in between. Different zones
carry different levels of multipliers applied for capital calculations.
In figure 6, over a five-month period in early 2020, we show the
total number of exceptions of HS VaR, with a backtesting period of
250 trading days specified in the regulatory framework [fig. 6]. Nev-
ertheless, the major indices (except for the Shanghai Composite in-
dex, sse) and oil experienced a steep increase in the number of ex-
ceptions between March and April 2020 (with the FTSE, DAX and
oil risk estimates in the amber zone), indicating that the Historical
Simulation method is unable to accommodate for the extreme market
events of early 2020. This shows a weakness of the HS method, and
raises a point that needs to be addressed by regulators and financial
institutions, namely to improve on the current market risk models.
5 Looking Ahead
As the previous sections highlight, some of the challenges in terms of

market risk measurement, as a result of the COVID-19 crisis, faced
by the regulatory bodies, local jurisdictions, and financial institu-
tions can be summarised as:
1. as a result of the increased values of risk measures, obtained
using regulatory calculations, the level of capital require-
ments rose dramatically, which is a challenge because such
high capital needs are very hard to meet; as such, improve-
ments should be made to the risk and capital calculations that
would lead to more realistic capital requirements;
2. risk assessments depend on the models used; and the estimat-
ed risks can display large variations as a result of this; this
model dependence needs to be addressed;
3. risk estimates obtained over longer horizons seem to be af-
fected more by the crisis, as compared to risk estimates ob-
tained over shorter horizons, which is a pattern shown by the
majority of assets considered in this study. This highlights that
the suitability of the ‘square root of time’ rule, which is cur-
rently stipulated by the regulation, needs more investigation;
4. a typical pattern we found is that market risk calculation
based on the current regulatory framework overestimates the
actual risk, which leads to the question of how the currently
stipulated risk calculations can be improved;
5. the large number of VaR breaches over the first 5 months of
the COVID-19 crisis is worrisome; these can be addressed via
improved risk calculations, or via improvements in the reg-
ulatory framework (e.g. the number of exceptions allowed).

6 Conclusions
As seen above, the events of early 2020 have had devastating con-
sequences globally including serious financial outcomes. In terms of
market risks, we found that in general the effects of the COVID-19 cri-
sis were more pronounced for longer horizons. It is vital for financial
institutions to do their best to prepare for such events, and for regu-
lators to encourage banks to set aside enough capital for future cri-
ses. So, it is important to have an appropriate modelling framework
that is able to quickly and appropriately respond to crisis events,
whilst leading to realistic and suitable bank capital requirements.
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Part 4
Financial Markets
109

Stefano Ramelli
University of Zurich, Switzerland
Alexander F. Wagner
University of Zurich, Switzerland; Swiss Finance Institute; European Corporate
Governance Institute; CEPR
Abstract When disaster strikes, the weak suffer mightily, the strong only slightly. That
is the lesson from stock market reactions to COVID-19. Strong firms had a robust financial
position, advanced environmental and social performance, and were not severely ex-
posed to social distancing and lockdowns. Firms with significant international exposure
suffered more, at least at first. The ultimate effects of policy interventions, including
those by central banks, have yet to be revealed. The market recovery in the second
quarter of 2020 is like a patient recovering from COVID-19: hopeful but still uncertain.
Managers and policymakers should project the future with great caution.
Keywords Stock markets. Tail risk. Industry sectors. COVID-19.
Summary 1 Introduction. – 2 Overall Stock Returns Over Time. – 3 What Makes Firms
Resilient Against Tail Risks? Learnings from COVID-19. – 4 Policy Interventions and
Stock Price Reactions. – 5 What is Behind the Exuberant Second Quarter of 2020? –
6 Implications for Business and Public Policy.
1 Introduction
The outbreak of COVID-19 took the world economy by surprise. The topic
“infectious diseases” was ranked number 10 in terms of impact in the World
Economic Forum’s Global Risk Report 2020, published on January 15, 2020,
but was considered quite unlikely. Only a few weeks later, attention shift-
ed dramatically. On March 11, the World Health Organization character-
ised COVID-19 as a pandemic. While in the second quarter of 2020 in many

ISBN [ebook] 978-88-6969-442-4
Open access 111
DOI 10.30687/978-88-6969-442-4/008
Stefano Ramelli, Alexander F. Wagner
countries – except notably in the US, Brazil, and some other coun-

tries – case and death growth rates had slowed down or reversed, at
the end of June 2020, uncertainty is again rising as countries such as
China experience new outbreaks and are again considering severe
lockdowns. Especially in light of the possibility of a second pandem-
ic wave, it is useful to look back and consider what can be learned
from financial market responses to the first wave.
As a tool supporting decisions about public policy interventions
but also private sector choices, asset price changes can be extreme-
ly valuable. In essence, asset markets provide ongoing, high-stakes
surveys regarding future expected outcomes. For corporate decision-
makers, it is especially important to learn from COVID-19 about what
makes firms resilient when a tail risk is realised.
Although the focus currently is on COVID-19, it should be stressed
that tail risks do exist in various domains. The lessons learnt from
this pandemic are likely to be valuable also in the context of other tail
risks, for instance those related to climate change or cybersecurity.
This paper begins by reviewing the worldwide stock-market de-
velopment in section 2. Section 3 summarises which firms were most
affected by the crisis. Section 4 reviews the stock-market based ev-
idence on policy interventions. While virtually all research so far
deals with the crisis period of the first quarter of 2020, section 5
provides insights on the recovery phase in the second quarter. Sec-
tion 6 concludes.
2 Overall Stock Returns Over Time
This section documents some facts about the global stock market per-
formance. It is important to distinguish different phases of the crisis.
We follow Ramelli and Wagner (forthcoming) for details of the timing
and expand the timeline of that study with newer data. Specifical-
ly, we organise our primary analysis along four periods: Incubation
(Thursday, January 2 through Friday, January 17)1, Outbreak (Mon-
day, January 20 through Friday, February 21)2, Fever (Monday, Feb-
ruary 24 through Friday, March 20)3, and Recovery (Monday, March
We thank an anonymous reviewer for constructive comments.

1 On December 31, 2019, cases of pneumonia detected in Wuhan, China, were first
reported to the WHO. On January 1, 2020, Chinese health authorities closed the Hua-
nan Seafood Wholesale Market after it was discovered that wild animals sold there
may be the source of the virus.
2 On January 20, Chinese health authorities confirmed human-to-human transmis-
sion of the Coronavirus, and the WHO issued the first situation report on the outbreak.
3 On February 23, Italy placed almost 50,000 people under strict lockdown in Lom-
bardy, one of the country’s most productive regions.

23 through June 8).4 Obviously, further updates may require the ad-
dition of a Relapse phase and other periods.
We retrieve daily stock prices for common shares from the Com-
pustat North America and Compustat Global databases (from Whar-
ton Research Data Services, WRDS). We adjust prices for dividends
and stock splits, and we keep only common stocks listed on major
stock exchanges in countries covered by the MSCI EQWI index (in-
cluding both developed and developing countries).5 We convert all
prices in USD, and we drop firms with less than USD10 million of
market capitalisation as of December 31, 2019. We end up with a sam-
ple of around 31,200 firms headquartered in 90 different countries.
Figure 1a plots equally-weighted stock returns in USD across coun-
tries with at least 50 firms, while figure 1b plots the value-weight-
ed ones.6 (Figures in local currency are available on request.) Sever-
al simple facts emerge. First, most countries saw their average firm
decline in value over the almost two quarters under consideration
(black bars). Second, the average firm performed best in Poland, Tur-
key, and Saudi Arabia, and worst in Mexico, South Africa, and Bra-
zil. The best value-weighted performance occurred in Saudi Arabia,
Denmark, and China; the worst in South Africa, Greece, and Brazil.
Third, every single country experienced negative (positive) equal-
and value-weighted average returns in the Fever (Recovery) peri-
ods [figs. 1a-b].
4 On Monday, March 23, the US Federal Reserve Board (Fed) announced a compre-
hensive bond purchase program (see § 4). The highest point that the S&P500 reached
in June was obtained on June 8, so we stop this period then.
5 We defined major stock exchanges as in Chaieb, Langlois, Scaillet 2020.
6 We consider both equal- and value-weighted figures because of the recent tenden-
cy, at least in some countries, of a pronounced concentration of market values among
a few companies.

Turkey
Saudi Arabia
Poland
Denmark
Argentina
China
Malaysia
Korea, Republic
Taiwan
Finland
Sweden
Germany
United Arab
Israel
Russian Federation
United States
Netherlands
Japan
Switzerland
Thailand
Peru
Canada
Chile
Belgium
Spain
Norway
France
Ireland
Italy
Cayman Islands
Singapore
Pakistan
Austria
Philippines
India
United Kingdom Incubation (Jan02-Jan17)
Hong Kong
Indonesia Outbreak (Jan20-Feb21)
Australia
Greece Fever (Feb24-March20)
Bermuda
Mexico
South Africa
Recovery (March23-June08)
Brazil
Overall (Jan02-June08)
-50 0 50 100
Cumulative raw return (%) -- Equally weighted
Saudi Arabia
Denmark
China
United States
Sweden
Finland
Ireland
United Arab
Germany
Cayman Islands
Korea, Republic
Taiwan
Switzerland
Malaysia
Japan
Israel
Australia
Netherlands
Turkey
Canada
Hong Kong
France
Italy
Thailand
Argentina
Chile
Norway
Poland
Singapore
Peru
Philippines
Spain
Belgium
United Kingdom
India
Russian Federation Incubation (Jan02-Jan17)
Austria
Mexico Outbreak (Jan20-Feb21)
Bermuda
Indonesia Fever (Feb24-March20)
Pakistan
South Africa
Brazil
Recovery (March23-June10)
Greece
-50 0 50 100
Cumulative raw return (%) -- Size weighted
Figures 1a-1b Cumulative returns across the world from January 2 through June 8, 2020

3 What Makes Firms Resilient Against Tail Risks?

Learnings from COVID-19
Figures 1a and 1b confirm that COVID-19 had a tremendous effect

on stock markets. While those figures highlight the average perfor-
mance, COVID-19 has differentially affected the valuations of com-
panies in the first quarter of 2020.
First, consider industry effects. In Ramelli and Wagner (forthcom-
ing), we show that, in the US, telecom services, food and staples
retailing, and utilities performed relatively well. Energy, consumer
services, and transportation were among the biggest losers. As an
ominous sign that the crisis was at least potentially wide-reaching,
in the Fever period consumer services were among the biggest los-
ers, and food and staples retailers were among the strongest win-
ners (again, relatively speaking). The between-industry differences
observed in the Fever period intuitively reflect different degrees of
disruption in firms’ operations caused by social distancing and lock-
down measures.7 As shown in figure 2, similar considerations also
emerge when looking at the between-industry performance in our in-
ternational sample of firms [fig. 2].
Energy
Banks
Consumer Services
Transportation
Real Estate
Diversified Financials
Consumer Durables & Apparel
Automobiles
Insurance
Commercial & Prof. Services
Retailing
Capital Goods
Media & Entertainment
Utilities
Materials
Tech Hardware
Food, Beverage & Tobacco
Food & Staples Retailing
Telecom services
Household & Personal Products
Software & Services
Semiconductors
Health Care
Pharma & Biotech
-40 -20 0 20 40 60
Cumulative raw return (%) -- Equally weighted
Incubation (Jan02-Jan17) Outbreak (Jan20-Feb21)

Fever (Feb24-March20) Recovery (March23-June08)
Figure 2 Stock returns by industry, international sample
7 Several measures of the extent to which job activities in different sectors can be
carried out from home and without human interaction in physical proximity are now
available (Dingel, Neiman 2020; Hensvik, Le Barbanchon, Rathelot 2020; Koren, Pető
2020). See Pagano, Wagner, Zechner 2020 for an analysis.

Second, especially in the Fever phase concerns about corporate debt

(leverage) and corporate liquidity (cash holdings) started to play an
important role (Ramelli, Wagner forthcoming). Figure 3 illustrates
this result in the international sample, focusing on the return effects
of being in the top quartiles of leverage or cash holdings [fig. 3]. With-
in the same industry and controlling for standard firm characteris-
tics (size, book-to-market, and profitability), highly-indebted firms
suffered severely in the Fever period; high-cash firms performed
relatively better. Intuitively, high-cash firms are more likely able to
survive and to preserve or expand their physical and human capi-
tal.8 Additionally, from a systemic perspective, the surge in the val-
ue of cash also suggests that as the crisis unfolded investors became
increasingly concerned about a tightening of firms’ access to exter-
nal finance. The policy measures taken by central banks seek to ad-
dress this concern; indeed, in the Recovery period, the effects of cash
and leverage reversed. See sections 4 and 5 for more on this topic.
15
10
Cumulative return (%)
-5
-10
Incubation Outbreak Fever Recovery

(Jan02-Jan17) (Jan20-Feb21) (Feb24-March20) (March23-June08)
Top quartile of cash holdings Top quartile of leverage
Figure 3 Relative cumulative performance of firms in the top quartile of cash holdings
in percent of assets and in the top quartile of leverage, international sample
Third, the role of international trade has received surprisingly little

attention. In Ramelli and Wagner (forthcoming), we document that
US firms with more export or supply chain exposure to China ex-
perienced substantially lower cumulative abnormal returns during
the Outbreak period, and to a lesser extent in the Incubation period.
8 Fahlenbrach, Rageth and Stulz (2020) confirm our results for the US sample. Ding
et al. (2020) report similar results in international data.

More generally, internationally-oriented companies did poorly over

these periods. Interestingly, when China seemed to get COVID-19 un-
der control, whereas the situation in Europe and the US worsened,
the effects reversed. This suggests that a second wave hitting spe-
cific countries might again see a drop in the value of firms relative-
ly more exposed to those particular countries.
Fourth, besides ‘hard’ factors such as the degree of exposure to
lockdown measures, financial strength, and reliance on internation-
al trade, some ‘softer’ factors may play an important role. For exam-
ple, Albuquerque et al. (2020) and Garel and Petit-Romec (2020) doc-
ument that stocks of firms with high environmental and social (ES)
ratings fared better during the market turmoil. Li et al. (2020) show
that stocks of firms with a strong corporate culture did better.
One natural question raised by these results is which investors val-
ued which aspects and why. Our early-stage work in Glossner et al.
(2020) suggests that institutional investors overall focused on hard
measures of financial resilience and did not noticeably increase their
stakes in high-ES firms (suggesting that retail investors may have
been responsible for the strong performance of these companies).
4 Policy Interventions and Stock Price Reactions
Some interventions, such as lockdowns or stay-at-home orders, were

directly aimed at containing the spread of the virus. The financial
market responses to such interventions have been investigated in a
number of studies. The first-order effect is negative for business ac-
cording to some studies, at least in the short term, though these in-
terventions do reduce infection and death rates (Barrot, Grassi, Sau-
vagnat 2020). However, because stock returns do respond to daily
unanticipated changes in COVID-19 cases (Alfaro et al. 2020), such
interventions can also have indirect beneficial effects for businesses
(Ashraf 2020; Chen et al. 2020). Further research is needed to clari-
fy the conditions under which interventions are (perceived as) harm-
ful or beneficial to the value of firms.
There were important and novel interventions by central banks.9
For example, on Monday, March 23 the US Federal Reserve Board
(Fed) announced two new facilities – the “Primary Market Corporate
Credit Facility” and the “Secondary Market Corporate Credit Facili-
ty” – to support credit to large corporations at least up to the end of
9 The initial intervention by the US Federal Reserve Board to cut interest rates was
met with a negative stock market response. Presumably, it was interpreted as a signal
that the situation was about to get worse.

Q3 2020.10 On April 9, the Fed expanded those programs.11 Consider-

ing short-term corporate bond reactions, D’Amico, Kurakula and Lee
et al. (2020), Haddad, Moreira and Muir (2020) and Nozawa and Qiu
(2020) find evidence in line with the notion that the Fed’s actions en-
hanced overall economic prospects and thus reduced default risk of
borrowers.12 In Ramelli and Wagner (forthcoming), we find differen-
tiated effects of the March 23 announcement. Stocks with high lev-
erage and low cash-holdings initially benefited, but after ten days,
the effect had reversed. Investors’ concerns about corporate leverage
and liquidity seem to have diminished somewhat after April 9, when
the Fed announced a significant expansion of its programs. One dif-
ficulty in assessing the impacts of these measures is that there was
also news about the spread of COVID-19, which would work against
the potential positive effects of the Fed’s intervention. The future will
reveal the long-term effects of these interventions.13
There were also fiscal policy interventions. For example, Ashraf
(2020) finds a neutral effect of income and debt relief support to
households, whereas K.J. Heyden and T. Heyden (2020) find that the
announcement of country-specific fiscal policy measures has negative
effects on stock returns. Future research should investigate under
which conditions such programs may have positive effects, and how
different firms were affected by these various types of interventions.14
Finally, appropriate political communication is likely to have
played a major role.15 Uncertainty plays a key role in the market
response (Gormsen, Koijen 2020; Landier, Thesmar 2020). Political
credibility and clear communication are key to reduce uncertainty
on both the pandemic and the policy responses, and hence, in turn,
to also support the proper functioning of financial markets.
10 https://www.federalreserve.gov/newsevents/pressreleases/moneta-
ry20200323b.htm.
11 https://www.federalreserve.gov/newsevents/pressreleases/monetar-
y20200409a.htm.
12 Brunnermeier and Krishnamurthy (2020) provide a theoretical analysis.
13 Although large central banks’ interventions in the corporate debt and equity markets
can certainly help listed corporations accessing external capital, they may also have unin-
tended effects in terms of pricing distortion. See, for instance, Barbon, Gianinazzi 2019.
14 For example, as described in Wagner, Zeckhauser, and Ziegler (2020), various pro-
visions of the Tax Cuts and Jobs Act that had been relevant to stock price responses at
the implementation of that Act were rolled back or altered by the CARES Act.
15 Coibion, Gorodnichenko and Weber (2020) provide survey evidence that household
beliefs and spending plans do not appear to be affected much by policy responses. Inter-
estingly, Hanspal, Weber and Wohlfart (2020) show that the stock market crash severely
affected expectations of households, for example, regarding retirement age. Thus, tan-
gible, realised losses do appear to shift household expectations. It will be interesting
to see whether these expectations reverse as well as the market in the second quarter.

5 What is Behind the Exuberant Second Quarter of 2020?
The first quarter of 2020 saw extreme uncertainty and steep stock
market declines. The real economy entered a state of emergency, un-
employment soared in many countries, corporate earnings proved
dismal, and double-digit percentage GDP drops never seen before
occurred. Yet, in the Recovery period the stock market rose virtu-
ally everywhere.
Large stock price reversals were common across firms, as figure 4
illustrates. This figure is a binned scatter plot. We sort all 29,465 in-
ternational firms for which data is available into 100 equal-sized bins
of cumulative returns in the Fever period. The vertical axis plots the
average cumulative returns in the Recovery period within each bin.
The stock returns in the Recovery period strongly negatively corre-
late to those in the Fever period. Interestingly, companies that had
small negative or even positive returns did not on average experi-
ence such a reversal [fig. 4].
200
Cumulative returns in Recovery in percent
150
100
50
0
-80 -60 -40 -20 0 20
Cumulative returns in Fever in percent
Figure 4 Returns in Fever and the Recovery Periods
How should one interpret the extraordinary market performance in

the second quarter and the pattern in figure 4? This question will
surely spur substantial future research. In the following, we suggest
a few possible explanations which might be worth further investigat-
ing (and which may not be mutually exclusive).
First, suppose that investors genuinely expected the worst to be
over, and hence inferred that valuations at the end of the second
quarter should be back to their pre-crisis levels (or slightly higher,
as investors also need to earn their cost of capital). Simple arithme-

tic then yields a shape consistent with the one plotted in figure 4.16
Intuitively, a stock that falls by 50% has to rise by 100% to get back
to the initial level, whereas a stock that falls by 10% only has to rise
by 11.1%. Notice that for this Recovery Arithmetic to be a candidate
explanation, investors would need to see both expected future cash
flows and uncertainty at similar levels as in the pre-crisis period.
While it is plausible that discount factors substantially declined dur-
ing the second quarter, general macroeconomic forecasts remain dis-
mal in many countries.
Second, figure 4 shows that the few firms that had been winners
in the Fever period and had exhibited positive returns do not, in fact,
on average show negative returns in the Recovery period (as they
would under the Recovery Arithmetic). This finding may reflect sus-
tained and structural changes in the economy and in how we live
and work, which give especially certain technology companies enor-
mous advantages.
Third, the medium-term stock price reaction to the Fed’s inter-
vention announcements may drive the returns. In other words, the
Fed is providing enormous liquidity and is indirectly supporting also
firms that did not suffer that much in the Fever period. (There is no
official distinction by industry in the Fed’s bond purchase programs,
for example.) This would also imply that there is distortion in market
prices away from fundamentals.
Fourth, the Recovery returns may be driven by individual inves-
tors, who may have ‘bought the dip’ gambling on the rebound of stock
prices perhaps amplified by a prolonged intervention of the Fed in-
to capital markets.17
In work in progress, we are seeking to distinguish these explana-
tions, in particular with the goal of determining the relative impor-
tance of fundamentals versus liquidity provided by central banks in
driving assets prices.
16 Consider a stock with an annual cost of equity of k%. Suppose for simplicity that
the stock pays no dividend. Roughly, we would expect a price appreciation for that stock
for the first two quarters of 0.5*k%. Suppose the stock price change in the first quar-
ter (or in the Fever period, assuming things were flat before) was f% (where for most
stocks, f<0). Then, to get to the expected price target by the end of Q2, the stock price
change in the Recovery period would need to be r = (1+0.5*k)/(1+f). Plotting this rela-
tionship with r on the vertical axis and f on the horizontal axis yields a non-linear re-
lationship such as figure 4.
17 In Glossner et al. (2020) we find that investors on “Robinhood” (a low-cost platform
increasingly popular among retail investors) tended to increase holdings in high-lever-
age and low-cash holdings during the first quarter of 2020. Thus, these investors tar-
geted companies that suffered heavily in the Fever period; conversely, they may, there-
fore, have done very well in the Recovery period.

6 Implications for Business and Public Policy
It is far too early to declare that an end is in sight for the COVID-19
pandemic. While the stock market, as a forward-looking device, has
been sending positive signals through the steep rise in the second
quarter of 2020, valuations remain tenuous. A resurgence of uncer-
tainty may lead to another round of sharp drops in equity markets.
Thus, it is not clear whether the second quarter was indeed a sus-
tainable recovery, or just a temporary phase before a heavy relapse
or perhaps even a devastating collapse.
Regardless, for corporate decision-makers and policy-makers,
some lessons of the first quarter 2020 are already clear. A powerful
driver of corporate resilience – which, in turn, helps also to secure
jobs and sustain the broader economy – has been a sufficiently strong
financial position before the pandemic hit. Worryingly, the COVID-19
crisis is leading to a substantial increase in both corporate and pub-
lic debt, which will potentially exacerbate the existing fragilities of
the financial markets. A critical policy objective will be to find new
ways to reduce these fragilities.
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Stock Performance
When Facing the Unexpected
Alfonso Dufour
Abstract The COVID-19 crisis has had enormous costs. The effects on financial mar-
kets were exacerbated by panic, fear of the unknown, fear of the end of the world as we
knew it. This panic obfuscated our ability to make rational predictions on future cash
flows and asset values. Overall though, our economic system is bouncing back. We can
learn from this experience and build more flexible models which can help us to better
manage severe systemic risks.
Keywords COVID-19. Equity market performance. CAPM. Beta. Volatility.
Summary 1 Introduction. – 2 The Perfect Storm: Panic and Uncertainty. – 3 The Timeline
of the COVID-19 Pandemic. – 4 The Effects of the COVID-19 Crisis on Equity Markets. –
5 Industry Groups. – 6 The Prediction of Financial Models (CAPM Beta). – 7Conclusions.
1 Introduction
This crisis has had huge costs in terms of human lives lost, great physical and
psychological suffering caused either directly by the disease or indirectly by
the drastic measures adopted to contain the spread of the virus. This pan-
demic will have enduring consequences on the world population, the econo-
my, our societies, the environment, and the financial systems. Notwithstand-
ing the enormity of the physical and psychological pain caused by the virus,
in this chapter 1 only reflect on the effects of the COVID-19 pandemic on the
equity markets. Financial markets, more generally, provide an essential price
discovery function. They aggregate demand and supply for assets and prod-

ISBN [ebook] 978-88-6969-442-4
Open access 125
DOI 10.30687/978-88-6969-442-4/009
Alfonso Dufour
Stock Performance when Facing the Unexpected
ucts and help us discover the value of these assets and products so
that we can properly allocate resources to particular projects, sec-
tors/industries and enterprises.
2 The Perfect Storm: Panic and Uncertainty
To assess the level of panic in the equity markets due to the COV-
ID-19 pandemic we can refer to two major volatility indices: the VIX
(CBOE Volatilty Index) in the US and the Vstoxx (Euro Stoxx 50 Vol-
atility Index) in Europe. These are the indices for the level of volatil-
ity implied from option contracts on major equity indices, the S&P
500 and the Euro Stoxx 50 in the US and Europe, respectively. The
VIX and the Vstoxx are often referred to as fear gauges capturing
the level of uncertainty in financial markets. Over the last 20 years,
these indices had two major peaks which reflect episodes of extreme-
ly high levels of uncertainty in the financial markets. The first peak
was in October 2008 during the credit crisis, and the second was in
March 2020 when the Western world went into lockdown.
In mid-March 2020, the announcement of drastic restrictive meas-
ures by US authorities precipitated the crisis. Market participants re-
alised that the COVID-19 pandemic was not going to be confined to
Asia. It had already started showing the first signs of potentially dev-
astating effects on Western economies and the lockdown increased
the likelihood of the most catastrophic scenarios. As the graphs in
figure 1 show, the US markets became even more fearful of the ef-
fects of the pandemic on equity values than what they were at the
time of the credit crisis [fig. 1]. Perhaps this is because the pandem-
ic severely affected New York, the main US financial centre. In Eu-
rope instead, financial markets reflected a relatively greater level of
uncertainty during the financial crises. The pandemic created hav-
oc in Italy and Spain sparing, at first, Europe’s main financial cen-
tres such as London, Frankfurt, and Paris. With so much fear and un-
certainty markets do not function well in discovering asset prices.
3 The Timeline of the COVID-19 Pandemic
So, how and when did it all begin? A new mysterious virus was first re-
ported by Chinese authorities to the World Health Organisation (WHO)
on December 31, 2019, although now scientists believe the virus was
already circulating in China since November 2019. Despite the dras-
tic containment measures taken by the Chinese authorities to try to
limit the contagion, unfortunately the virus spread to other countries
in South East Asia. The virus was showing unexpected strength and
high infection rates which could yield high mortality rates. By the end
Alfonso Dufour
Figure 1 The volatility indices. This figure presents the time series for the daily values of the VIX
and the VSTOXX indices from 29 May 2000 to 30 May 2020. The data were downloaded
from the Thompson Reuters Eikon platform

Alfonso Dufour
of January, the virus had spread to 18 countries outside China. On Jan-

uary 30, 2020, the WHO officially declared the status of Internation-
al Health Emergency. This declaration triggered a series of health
procedures and travel restrictions across the world. On February 11,
2020, the WHO named the new coronavirus as COVID-19. On March
11, 2020, the WHO declared the outbreak of a global pandemic.1
The first western country to enter into a national lockdown was It-
aly on March 10, 2020. On March 13, 2020, President Trump declared
a national emergency initiating a series of government response pro-
cedures.2 In the following days, a number of other European coun-
tries adopted restrictive measures and on March 23, 2020 the UK
also entered into a national lockdown.3 In the US, the first “stay at
home” order was issued by California on March 19, 2020.4 Although
a US-wide lockdown was never implemented, most states adopted re-
strictive measures.5
4 The Effects of the COVID-19 Crisis on Equity Markets
The Italian, UK and US stock markets started a rapid decline on Feb-

ruary 20, 2020 when the new virus was rapidly spreading across Eu-
rope and the US [fig. 2]. The Italian equity market suffered the steep-
est fall and reached the lowest level on March 12, 2020 [fig. 3]. In less
than a month, the Italian equity market fell by more than 41%. It took
a bit longer for the US and the UK markets to reach their lowest lev-
el. This came on the March 23 when the FTSE 100 Index closed down
by almost 200 points for the day.
1 The timeline of the pandemic is based on a report by the World Health Organisa-
tion detailing its response to the COVID-19 crisis. The report is available at https://
www.who.int/news-room/detail/29-06-2020-covidtimeline.
2 See for example, https://edition.cnn.com/2020/03/13/politics/states-coro-
navirus-fema/index.html.
3 On March 9, 2020, the Italian prime minister Giuseppe Conte signed a decree for
the implementation of a national lockdown starting from March 10, 2020. Detailed in-
formation on the measures implemented by governments in response to the pandemic
is provided by Oxford University’s COVID-19 Government Response Tracker, which is
available at https://www.bsg.ox.ac.uk/covidtracker.
4 See the Executive Order N-33-20 issued by California at https://www.gov.ca.gov/
wp-content/uploads/2020/03/3.19.20-attested-EO-N-33-20-COVID-19-HEALTH-OR-
DER.pdf.
5 A list of the states implementing ‘stay at home’ orders is available at https://www.
nbcnews.com/health/health-news/here-are-stay-home-orders-across-country-
n1168736.

Alfonso Dufour
Figure 2 The scale for the S&P 500 Index is indicated on the left-hand side and the scale for the FTSE 100 index
is indicated on the right-hand side. The sample covers the period from September 3, 2019 to June 25, 2020. The
data was downloaded from the Thompson Reuters Eikon platform
Figure 3 The scale for the FTSE 100 Index is indicated on the left-hand side and the scale for the FTSE MIB
index is indicated on the right-hand side. The sample covers the period from September 3, 2019 to June 25,
2020. The data was downloaded from the Thompson Reuters Eikon platform
Over the period from February 19 to March 23, 2020, the UK FTSE
100 index lost about 33% and the S&P 500 index about 34% of their
values, respectively. The worst daily price change for the UK equi-
ty market was recorded on March 12 when the FTSE 100 Index lost
10.87% in a single day. This is the largest single-day drop recorded
over the last 20 years (since May 30, 2000). Table 1 shows the dis-
tinct phases of the COVID-19 crisis so far and summarises the chang-
es in the values of the benchmark Italian, UK and US equity indices.

Alfonso Dufour
Table 1 Equity price changes during the COVID-19 crisis
Country Decline Index Recovery Index COVID-19 Index

phase change phase change crisis and change
(%) (%) recovery (%)
period
Italy Feb 19 - -41.54 Mar 12 - 30.02 Feb 19 - -20.59
Mar 12, 2020 Jun 8, 2020 Jun 8, 2020
UK Feb 19 - -33.03 Mar 23 - 29.61 Feb 19 - -13.20
Mar 23, 2020 Jun 8, 2020 Jun 8, 2020
USA Feb 19 - -33.92 Mar 23 - 44.47 Feb 19 - -4.54
Mar 23, 2020 Jun 8, 2020 Jun 8, 2020
The equity indices used for Italy, UK and USA are FTSE MIB, FTSE 100 and S&P 500,
respectively. Returns were computed using daily data which was downloaded from
the Thompson Reuters Eikon platform.
5 Industry Groups
The performance of the various industry groups during the decline

and recovery phases of the crisis is summarised in tables 2 and 3 be-
low. The industry returns are value-weighted and thus they will be
driven by the performance of the largest companies in each sector.
In the UK, the transportation industry was the most affected (-63%).
With the lockdown in place, aeroplanes were grounded, international
travel stopped almost completely, and most people were housebound.
More surprisingly, the media and entertainment industry (WPP, Pear-
son, etc.) was the second worst performing industry during the de-
cline phase. With many businesses halted by health and safety re-
strictions, advertising budgets froze, and fairs and exhibitions were
cancelled; this hit the UK media industry, which relies almost exclu-
sively on ad revenue. However, in the US the increased demand for
news and home entertainment helped online American media com-
panies (Google, Facebook, Walt Disney, etc.) to recover more rapid-
ly than other industries.
Industries providing core and essential services or those that were
able to adapt quickly to flexible/distance working conditions suffered
lower declines and recovered very quickly (for example, e-commerce,
technology, software services). In the US, the retailing (Amazon,
Ebay, Dollar General) and technology industries managed to weath-
er the COVID-19 storm better than other industries posting double
digit increases in aggregate industry values.

Alfonso Dufour
Table 2 The performance of the FTSE 100 index components by industry groups
over the COVID-19 crisis from December 2019 to June 2020
Decline Recovery Overall

FTSE 100 - Industry Groups 1 Jan Rank 27 Mar Rank 27 Dec 19 Rank
-27 Mar 20 (%) -26 Jun 20 (%) -26 Jun 20 (%)
Banks (5) -28.11% 16 -16.74% 22 -40.86% 20
Capital Goods (9) -24.95% 14 9.81% 9 -19.16% 12
Commercial & Professional -8.05% 4 10.89% 8 0.72% 5

Services (5)
Consumer Durables & Apparel (5) -30.55% 18 9.11% 10 -24.02% 17
Consumer Services (5) -30.87% 19 5.08% 15 -28.00% 18
Diversified Financials (8) -20.28% 10 11.65% 7 -11.47% 10
Energy (3) -35.76% 20 -7.16% 21 -41.59% 21
Food & Staples Retailing (3) -8.83% 5 -1.60% 19 -10.23% 9
Food, Beverage & Tobacco (5) -18.77% 7 6.59% 13 -14.05% 11
Health Care Equipment & -23.47% 12 6.13% 14 -20.82% 13

Services (1)
Household & Personal Products (2) -6.15% 2 13.56% 6 5.63% 2
Insurance (6) -24.54% 13 3.07% 16 -22.50% 15
Materials (14) -25.54% 15 23.04% 2 -8.78% 8
Media & Entertainment (6) -38.76% 21 6.75% 12 -35.42% 19
Pharmaceuticals, Biotechnology -12.26% 6 16.83% 4 0.74% 4

& Life Sciences (3)
Real Estate (3) -28.81% 17 7.35% 11 -22.27% 14
Retailing (5) -19.49% 8 31.95% 1 7.00% 1
Software & Services (3) -19.53% 9 17.07% 3 -7.06% 7
Technology Hardware -6.76% 3 14.65% 5 5.50% 3

& Equipment (1)
Telecommunication Services (2) -21.00% 11 -0.92% 18 -23.47% 16
Transportation (1) -62.96% 22 -1.90% 20 -63.72% 22
Utilities (5) -1.92% 1 2.46% 17 -0.78% 6
The table presents cumulative returns for the various industry groups. These are
percentage changes in the aggregate value (market capitalisation) of each industry
group. The lowest rank is given to the best performing industry group during each
phase. The best 5 performing industries are coloured in green and the worst 5 in red.
The data was downloaded from the Thompson Reuters Eikon platform.

Alfonso Dufour
Table 4 The performance of the S&P 500 index components by industry groups
over the COVID-19 crisis from December 2019 to June 2020
Decline Recovery Overall

S&P 500 - Industry Groups 1 Jan 20 Rank 27 Mar Rank 27 Dec 19 Rank
-27 Mar 20 (%) -26 Jun 20 (%) -26 Jun 20 (%)
Automobiles & Components (4) -40.92% 23 19.74% 8 -29.66% 22
Banks (18) -36.59% 22 4.43% 23 -34.05% 23
Capital Goods (48) -25.28% 18 8.63% 18 -19.33% 20
Commercial & Professional -16.69% 12 16.55% 10 -2.54% 7

Services (10)
Consumer Durables & Apparel -27.58% 19 17.97% 9 -14.38% 17
(18)
Consumer Services (15) -31.48% 21 8.29% 19 -26.14% 21
Diversified Financials (26) -21.56% 15 10.47% 15 -13.64% 16
Energy (26) -48.69% 24 22.92% 5 -37.03% 24
Food & Staples Retailing (5) -9.27% 3 6.07% 21 -4.19% 9
Food, Beverage & Tobacco (21) -17.37% 13 7.96% 20 -10.68% 14
Health Care Equipment & -16.68% 11 13.76% 12 -5.39% 10

Services (38)
Household & Personal Products (7) -12.57% 6 10.81% 14 -3.19% 8
Insurance (22) -28.04% 20 12.01% 13 -19.09% 19
Materials (28) -25.13% 17 20.32% 7 -9.83% 12
Media & Entertainment (22) -15.69% 10 24.63% 3 3.64% 5
Pharmaceuticals, Biotechnology -12.36% 5 14.57% 11 0.04% 6

& Life Sciences (24)
Real Estate (31) -19.15% 14 9.89% 17 -10.38% 13
Retailing (24) -7.63% 2 34.48% 1 23.31% 1
Semiconductors & -12.03% 4 22.04% 6 6.62% 4

Semiconductor Equipment (16)
Software & Services (35) -7.08% 1 23.14% 4 13.73% 3
Technology Hardware & -14.27% 9 32.43% 2 14.56% 2

Equipment (20)
Telecommunication Services (4) -13.90% 7 5.28% 22 -9.18% 11
Transportation (15) -23.11% 16 10.26% 16 -15.92% 18
Utilities (28) -14.25% 8 0.64% 24 -13.07% 15
The table presents cumulative returns for the various industry groups. These are
percentage changes in the aggregate value (market capitalisation) of each industry
group. The lowest rank is given to the best performing industry group during each
phase. The best 5 performing industries are coloured in green and the worst 5 in red.
The data was downloaded from the Thompson Reuters Eikon platform.

Alfonso Dufour
The share prices of US and European banks have been falling signif-
icantly since the beginning of the COVID-19 crisis as investors have
been fearing that the disruption to business caused by the lockdown
may increase default rates on bank loans, while continuing monetary
stimulus may keep interest rates low, thus hurting banks’ margins
and profitability. In addition, regulators have urged banks to freeze
dividend payments to shareholders and strengthen their core capi-
tal so that they would be able to absorb larger than expected losses
in their loan portfolios.
Another industry hit hard by the pandemic has been the energy
industry. The travel restrictions and the lockdown created a sharp
fall in the demand for oil. Such a deep and sudden negative demand
shock combined with a relatively sticky supply created the perfect
storm with devastating effects on oil prices. The negative pressure on
oil prices was amplified by the delays in finding an agreement among
oil-producing countries on the appropriate, joint response to dwin-
dling energy demand. Thus, the excess oil supply led to increases in
oil inventories and a sharp fall in oil prices. All available storage was
full and sellers had to pay buyers to take oil off their hands. Oil was
cheap but the cost of storage had surged. On Monday April 20, 2020,
the light crude oil contract trading on the New York Mercantile ex-
change reached a minimum of about negative $40 per barrel. This cre-
ated a problem. Traditionally, financial models assume that asset pric-
es do not go below the zero level. Thus, how do we price an asset with
negative prices? Financial markets had to scramble and implement
ad-hoc models to allow commodity prices to reach negative values.6
6 The Prediction of Financial Models (CAPM Beta)
Usually, our financial models would suggest taking refuge in defen-

sive stocks during downturns and then shifting to more aggressive
stocks during the rebound. Stocks would be classified using the be-
ta coefficient of the Capital Asset Pricing Model (CAPM) which in-
dicates how correlated and sensitive a particular stock is to move-
ments in the whole financial market. Low beta stocks (with beta less
than 1) are often called defensive stocks. They have more stable per-
formance and relatively lower volatility. Whereas, high beta stocks
(with beta greater than 1) are called aggressive stocks. These are
riskier but can potentially deliver higher returns. How did so-called
6 See the note released by the CME on April 8, 2020 at https://www.cmegroup.com/

content/dam/cmegroup/notices/clearing/2020/04/Chadv20-152.pdf. Eventually,
on 22 April 2020, CME Clearing adopted the Bachelier Option Pricing Model (https://
www.cmegroup.com/notices/clearing/2020/04/Chadv20-171.html).

Alfonso Dufour
defensive stocks perform during the declining phase of the pandem-

ic? Did the market behave as expected supporting financial theories
or instead provided further evidence of the limitations of existing fi-
nancial models and thus calling for new theories to be developed?
I used industry CAPM beta coefficients computed by Aswath Da-
modaran in January 2020 for US stocks and related them to cumula-
tive stock returns during the two main phases of the COVID-19 pan-
demic.7 Figure 4 shows scatter plots relating cumulative returns for
the stocks included in the S&P 500 index with their industry beta
during the decline and recovery phases of the COVID-19 pandemic
[fig. 4]. The scatter plots also show the trend line which summaris-
es the relationships between cumulative returns and CAPM betas.
The CAPM model worked very well during the recovery phase
when high beta stocks clearly bounced back more rapidly than low
beta stocks posting high cumulative returns. This evidence seems
consistent with the more rigorous work conducted by Savor and Wil-
son (2014) which shows how on days with macroeconomic announce-
ments there is a strong positive relation between average returns and
stock betas as predicted by the CAPM model. On other days though,
the same relationship does not hold. Hence, our financial models
seem to work well during the recovery phase of the crisis as well as
on announcement days because, as Savor and Wilson (2014) note, in
these days there is “a clear link between macroeconomic risk and as-
set returns”. When traders are driven by panic and fear instead, our
traditional models based on long-term expectations and rational be-
haviour break down. The return-risk relationship observed during
the decline phase is almost flat. Thus, the intuition of investing in de-
fensive stocks might have just marginally limited investment losses.
This preliminary evidence seems to support Lopez de Prado (2019)’s
call for the development of more flexible models which are optimal
under different regimes and market conditions.
7 The CAPM beta data is available at http://people.stern.nyu.edu/adamodar/New_

Home_Page/datacurrent.html. The cumulative returns were computed using data
downloaded from the Thompson Reuters Eikon platform.

Alfonso Dufour
Figure 4 Cumulative stock returns (%) versus CAPM industry beta coefficients
for the S&P 500 Index stock components. A dotted trend line is shown. Cumulative
returns were computed using stock data downloaded from the Thompson
Reuters Eikon platform. The CAPM industry beta coefficients were estimated
by Aswath Damodaran for January 2020

Alfonso Dufour
7 Conclusions
This pandemic has destabilised our financial markets and severely af-
fected our economies. Governments have now committed enormous
resources to help the economy recover. Financial markets and finan-
cial infrastructures will have to play their part. It is time to start re-
flecting on the lessons from the pandemic. We are now in a world with
potentially negative prices and with negative interest rates. We are
very interconnected and therefore vulnerable to factors which may
lead to systemic crises (credit and liquidity shortages, pandemics,
cybersecurity attacks, etc.). Given the extreme scenarios created by
the pandemic, it is important to gather relevant data and reflect on
whether our models are still fit for purpose. If not, we should use the
evidence to guide the development of new theories and models. These
theories and models should help us better rationalise the effects of
these crises on asset values and prevent reaching extreme levels of
uncertainty which may have contributed to escalating the crisis. At
the outburst of the pandemic, the priority of governments and regu-
lators correctly focused on adopting all measures necessary to save
human lives. Perhaps for future pandemic scenarios we should more
promptly implement measures to mitigate the impact of the pandem-
ic on our businesses and financial markets hence preventing reach-
ing such an extreme level of uncertainty about firm and asset values.
Clearly, we are not out of the woods yet with respect to COVID-19.
The disease is still spreading around the world and a second wave is
still likely if a vaccine is not developed before the next flu season. The
economic engine of the Western world was temporarily switched off
to “stop the virus and save the NHS” as we were saying in the UK. It
is now the time to switch on the economic accelerator and take the op-
portunity to learn from the crisis and set the foundations for creating
an even stronger, more resilient, and more equitable financial system.
Bibliography
López de Prado, M. (2019). “Tactical Investment Algorithms”. Working paper.

http://dx.doi.org/10.2139/ssrn.3459866.
Savor, P.; Wilson, M. (2014). “Asset Pricing: A Tale of Two Days”. Journal of Fi-
nancial Economics, 113, 171-201. http://dx.doi.org/10.1016/j.jfine-
co.2014.04.005.

The COVID-19 Challenge

to European Financial Markets
Lessons from Italy
Nicola Borri
LUISS Guido Carli, Roma, Italia
Abstract The COVID-19 pandemic has sickened more than 10 million people around
the world and killed at least 500,000. In this chapter, we focus on the experience of Italy,
which is the first country hit by the virus in Europe. While the lockdown measures appear
to have successfully contained the virus, the economic consequences have been very
severe. Policy makers should study the Italian experience to evaluate the cost-benefit
effectiveness of different policies in containing the pandemic.
Keywords COVID-19. Italy. Pandemic. Lockdown. ECB.
Summary 1 Introduction. – 2 The Evolution of the Health Crisis in Italy. – 3 The

Government Response to the Pandemic. – 4 The Economic Effects of the Pandemic. –
5 Conclusions.
1 Introduction
As a result of the COVID-19 pandemic, nearly 3 billion people worldwide have

been under lockdowns put in place by governments to stop the virus, with se-
vere consequences for workers, firms, and public finances. The pandemic is
also expected to have long-run effects on the economy and individuals’ well-
being which cannot be fully assessed yet.
The diffusion of the pandemic, according to data and evidence current-
ly available, was very fast. The starting point is usually traced back to Wu-
han (China), at the end of 2019, when dozens of cases from an unknown vi-
rus were registered. In January 2020, Japan and South Korea confirmed the

ISBN [ebook] 978-88-6969-442-4
Open access 137
DOI 10.30687/978-88-6969-442-4/010
Nicola Borri
The COVID-19 Challenge to European Financial Markets. Lessons from Italy
first cases outside mainland China, and towards the end of Febru-
ary 2020 infections surged in South Korea and Italy. Since then, most
countries in the world have been affected, although with different in-
tensities, in part depending on the type and timing of social distanc-
ing measures in place.
In this chapter, we focus on the experience of Italy, which is the
first country hit by the virus in Europe. We believe the example of
Italy is of particular interest for at least three reasons. First, Italy is
considered approximately 2-3 weeks ahead of other advanced econ-
omies in the state of the pandemic. Second, Italy put in place one of
the stricter lockdown policies, practically halting a large fraction of
the economic activities and the movement of people not only across
the country, but also within cities and towns. Therefore, Italy is an
interesting case study to evaluate the effectiveness of different pol-
icies in fighting the pandemic and their economic and social costs.
Third, because Italy is one of the advanced countries with the most
fragile government finances, and with a stagnant economy for at least
a decade, the COVID-19 shock could spark an economic crisis which
could potentially propagate to the Eurozone and beyond.
The rest of the chapter is organised as follows. Section 2 describes
the evolution of the health crisis in Italy. Section 3 presents the gov-
ernment response to the health emergency. Section 4 describes the
economic effects of the pandemic in Italy. Finally, in Section 5 we
present our conclusions.
2 The Evolution of the Health Crisis in Italy
After four months since the outbreak of the pandemic, the situation
in Italy is finally stabilising, but the death toll is dramatic. The num-
ber of active cases is declining, as is the number of daily deaths due
to COVID-19, which is approaching zero. Figure 1, using official data
from the Italian Protezione Civile, shows a breakdown of the evolu-
tion of the pandemic in Italy into active cases (roughly 16 thousand at
the end of June), deaths (roughly 35 thousand at the end of June) and
recovered cases (roughly 200 thousand at the end of June) [fig. 1]. The
figure shows that the number of active cases reached a peak at the
end of April 2020, and then slowly declined as the number of recovered
cases increased. Differently from other countries, like the US, where
the diffusion of the pandemic resumed to grow after a first stabilisa-
tion, current data for Italy do not show any resurgence of the virus.
Figure 2 considers alternative measures of the state of the pan-
demic, and in particular the number of patients hospitalized or in
quarantine [fig. 2].
One of the lessons from the Italian experience with the pandemic is
that congestion of hospitals, and in particular of intensive care units
Nicola Borri
Figure 1 The Evolution of the COVID-19 Pandemic in Italy. Notes: the figure shows the evolution of the
COVID-19 pandemic in Italy. The black solid line corresponds to the cumulated number of cases; the orange-
shaded are active cases; the blue-shaded area are COVID-19 deaths; the gray-shaded area indicates recovered
cases. Data are from Protezione Civile and available at: https://github.com/pcm-dpc/COVID-19
Figure 2 Patients Hospitalized and in Quarantine. Notes: the figure plots the evolution of the patients
hospitalized in ICUs (top panel); hospitalized, but in less severe conditions (middle panel); and in quarantine
at home (bottom panel). The black solid lines correspond to the 7-day moving average. Data are from
Protezione Civile and available at: https://github.com/pcm-dpc/COVID-19

Nicola Borri
(ICUs), should be avoided at all costs. In fact, given the exponential

path of the uncontrolled pandemic, hospitals are likely to work at ca-
pacity, unable to cure all COVID-19 patients, and forced to postpone
non-essential treatment to non COVID-19 patients with health conse-
quences that are difficult to predict. The current data show that both
the number of patients in ICUs, and the number of hospitalized pa-
tients in less severe conditions, are currently steadily declining (see
the top and middle panels of figure 2). Specifically, the number of pa-
tients in ICUs reached a maximum value of approximately 4,000 in
April, at the peak of the pandemic. As the diffusion of the pandemic
was particularly severe in the North of the country, ICUs in these re-
gions worked at full capacity, and this might have increased the true
death toll (e.g. Bonanno, Galletta, Puca 2020; Galeotti, Surico 2020).
Finally, the bottom panel of figure 2 shows the evolution of the pa-
tients in quarantine at home which has also been steadily declining.
Although these are patients with less severe symptoms, they risk in-
fecting their relatives and/or anyone living in their homes.
The diffusion of the pandemic in Italy has been very heteroge-
nous across the Italian regions. Specifically, the pandemic was con-
centrated in the North of the country, and in particular in Lombar-
dia, Piemonte, Veneto and Emilia Romagna. These regions account
for approximately 40% of the Italian gross domestic product (GDP)
and are populated by a large number of firms with interactions with
firms scattered around the world. This could have been at the origin
of the first contagion with the COVID-19 virus. Figure 3 shows the
number of current active cases, along the number of cases at the be-
ginning of three different phases of the lockdown (described in the
next section), at the province level (note that these numbers are not
divided by population) [fig. 3]. A quick look at the figure immediately
reveals the strong geographic component of the pandemic and indi-
cates that the lockdown was successful in containing the spreading
of the virus throughout the country.
It is important to notice that the heterogeneity in the diffusion of
the pandemic does not depend on, for example, differences in the fre-
quency of testing. For example, we observe similar heterogeneity in
the evolution of the COVID-19 deaths across Italian regions. Figure
4 shows that approximately 65% of the total COVID-19 deaths oc-
curred in five regions: Lombardia, Piemonte, Emilia Romagna, Vene-
to and Liguria [fig. 4].

Nicola Borri
Figure 3 Number of COVID-19 Positives. Notes: The figure plots the total number of active COVID-19 cases
at the province level. The size of the circles increases with the number of active cases. The colors correspond
to different dates: first phase of national lockdown (blue, March 9, 2020); second phase of national lockdown
(orange, May 4, 2020); third phase of national lockdown (yellow, June 15, 2020); current time (violet, June 30,
2020). Data are from Protezione Civile and available at: https://github.com/pcm-dpc/COVID-19
Figure 4 Evolution COVID-19 Deaths at Regional Level. Notes: The figure plots the evolution of the COVID-19
deaths for a sample of Italian regions. For each region, the values on the horizontal axis correspond to the
number of days since the first COVID-19 death. The y-axis is in log-scale, the y-ticks correspond to numbers
in levels. The straight lines from the origin correspond to daily growth rates of, respectively, 10%, 20%,
and 33%. Data are from Protezione Civile and available at: https://github.com/pcm-dpc/COVID-19

Nicola Borri
3 The Government Response to the Pandemic
In this section we consider the response of the Italian government to

the health emergency, while in the next section we additionally con-
sider the government response to the economic crisis.
The response of the Italian government to the pandemic has been
a strict lockdown. We can roughly distinguish three phases of the
lockdown. The first phase started on March 9 in all regions and im-
plied the closing of schools, some economic activities (for example,
restaurants, hospitality and non-food retail sectors), and the restric-
tion of movement of people not only across regions, but also within
regions and municipalities. In addition, on March 23 all non-essen-
tial economic activities were also shut down, affecting approximate-
ly 51% of firms and 55% of workers. The lockdown of economic activ-
ities, because of the heterogeneity in the geographical distribution
of essential activities, determined differences in the fraction of inac-
tive workers across different provinces [fig. 5].
Borri, Drago, Sobbrio (2020) used exactly this policy induced het-
erogeneity in the fraction of inactive workers to evaluate the effec-
tiveness of the economic lockdown. Table 1 summarises their results.
Specifically, while the estimated effect of the share of inactive work-
ers goes in the right direction and is associated to a reduction in the
number of COVID-19 infected patients, the estimates are not statis-
tically significant. Borri, Drago, Sobbrio (2020) argue that their re-
sults, rather than evidence against the effectiveness of the lockdown,
highlight the importance of good quality granular data, for exam-
ple at the municipal level, and/or accounting for mobility patterns.
Table 1 Effect of the economic Lockdown
COVID-19 positive cases (province level)

All provinces Provinces Provinces above median
in North at lockdown
∆ inactive post-lockdown -139.977 -356.936 -305.268
(87.030) (218.068) (229.712)
Obs. 3640 1540 1540
FE province level YES YES YES
FE region-day YES YES YES
Unconditional mean 796.8 1496 1556
dependent variable
Notes: robust standard errors clustered at provincial level. Regression includes five
lags of dependent variable. The table report the estimates of a panel estimation model
for the COVID-19 positive cases (at the province level) on the share of inactive workers
as a consequence of the lockdown. The estimations always include a fixed effect at the
province level; a fixed effect at the region-day level. The table is from Borri et al. 2020.

Nicola Borri
Figure 5 Share of Inactive Workers. Notes: The figure represents the share of inactive workers
as a consequence of the first phase of the economic lockdown. Dark (lighter) colours correspond
to a higher (lower) fraction of inactive workers. The figure is from Borri et al. 2020
The second and third phases correspond to the relaxation of the lock-
down. Specifically, the second phase started on May 4, with the re-
opening of economic activities, and the relaxation of the restrictions
to the movement within regions. Finally, the third phase started
on June 15, and implied the relaxation of most lockdown measures.
However, all schools remained closed and the use of masks in public
places is currently mandatory. It is too early to be able to evaluate
the risks and/or effects associated to the relaxation of the lockdown
measures in the second and third phases in Italy.

Nicola Borri
4 The Economic Effects of the Pandemic
While the lockdown, decided by the Italian government, has been so

far effective at containing the pandemic, its economic effects have
been very severe. Italian GDP is expected to drop by approximate-
ly 10% in 2020 (Bloomberg). This historically large drop in GDP de-
pends on the expected decrease in consumption (-11.8%), investment
(-15.4%), and industrial production (-14.5%). Government deficit is ex-
pected to be large and equal to 12.2% and, correspondingly, public
debt is expected to reach 150% of GDP. The large increase in public
debt depends on both the increase in public spending put in place to
limit the negative effects of the pandemic (i.e. unemployment ben-
efits, credit guarantees to firms, healthcare investments, etc.), and
the sharp reduction in tax revenues because of the lower output.
The fiscal response by the Italian government has been so far limit-
ed and constrained by the large public debt. The approved measures,
worth around 1% of GDP, are associated to emergency financing of
the health system; employment and income support; tax deferrals and
utility bills; and support of credit supply. Most analysts also expect
a quick recovery in 2021, after the end of the lockdown. For exam-
ple, for 2021, they expect an increase in GDP of approximately 5.6%.
However, there is substantial uncertainty around all these estimates,
as well as over the likelihood that a second COVID-19 wave could hit
advanced economies in the Fall/Winter of 2020.
Because of the large public debt and low economic growth before
the COVID-19 shock, Italy is particularly exposed to the recent crisis.
In addition, the fragile public finances limit the resources that the gov-
ernment could inject in the economy, thus increasing the risk of a deep
recession. In fact, Italy is expected to be one of the economies most se-
verely hit in the Eurozone. The response of equity markets, which are
forward looking, confirms the difficult economic Italian outlook. Fig-
ure 6 shows the evolution of three equity indices, normalised to 1 on
January 1, 2020 [fig. 6]. The equity indices correspond to the S&P500
for US equity markets, the Eurostoxx50 for Eurozone equity markets,
and the FTSE MIB for the Italian equity market (data are from Bloomb-
erg). The figure shows that while the initial drop in the equity market
in Italy and the rest of the Eurozone was similar, the recovery has been
weaker in Italy. In fact, equity markets dropped, first, by roughly 35%
in Italy and the rest of the Eurozone, and by 30% in the US. The inter-
vention by the major central banks, which announced large asset pur-
chase programmes like the Pandemic Emergency Purchase Program
(PEPP) by the European Central Bank (ECB), helped to put a floor to
the fall in equity markets. However, while the US equity market has
gained back almost all of the lost ground, the Eurozone market and,
especially, the Italian market, are still approximately 15% lower than
their values at the beginning of the year.
Nicola Borri
Figure 6 Equity Markets around the Great Lockdown. Notes: the figure shows the evolution of the prices
of the S&P500 (solid yellow line), Eurostoxx50 (solid red line), and FTSE MIB (solid blue line) indices.
All series are normalised to 1 on January 1, 2020. The vertical lines correspond to the Wuhan lockdown,
the first lockdown in Italy limited to some regions in the North, and the announcement of the ECB PEPP
programme. Data are from Bloomberg
Because investors and policy makers expect a large increase in public

debt, and a significant fall in output and tax revenues, they also worry
about the possible default of one, or more, members of the Eurozone,
overwhelmed by a striking crisis and thus compelled to stop servic-
ing their debt. Figure 7 shows the evolution of government bond yields
for Italy, Spain and Portugal (the data are from Bloomberg) [fig. 7]. As
we have seen for equity markets, also for government bonds we first
see a sharp increase in yields (and, thus, a sharp drop in prices). For
example, the yield on the 10-year Italian government bond increased
from 150 to more than 250 basis points. We observe a similar increase
in yields also for Spain and Portugal which, however, had lower yields
before the COVID-19 shock. Even so, it appears that the intervention
by the ECB, with the announcement of the PEPP asset purchase pro-
gramme, was able to avoid the risk of a sovereign debt crisis.
Bonaccolto, Borri, Consiglio (2020) find also evidence of an in-
crease in the redenomination risk for France and Italy since the be-
ginning of January 2020, i.e. the risk that one, or both, of these two
countries abandon the Euro for a new, undervalued, currency. Howev-
er, they also find that this risk is historically lower than after political
shocks, like the recent election in Italy of an anti-euro government.
Nicola Borri
Figure 7 Government Bond Yields around the Great Lockdown. Notes: the figure shows the evolution
of the yields of the Italian (solid blue line), Spanish (solid red line), and Portuguese (solid yellow line) 10-year
benchmark government bonds. The vertical lines correspond to the Wuhan lockdown, the first lockdown in
Italy limited to some regions in the North, and the announcement of the ECB PEPP programme. Yields are
reported in basis points. Data are from Bloomberg
5 Conclusions
Italy is one of the first advanced economies hit by the COVID-19 pan-
demic. After approximately four months, the health crisis has stabi-
lised, and the pandemic appears to be under control. However, there
is still a lot of uncertainty around the possibility that a second wave
could hit the country in the next Fall.
One of the lessons from the Italian experience is that strict lock-
down measures are necessary to stop the pandemic and avoid that
the virus spreads across regions. In addition, large scale testing is
crucial to identify positive cases with no or small symptoms. In fact,
within Italy, we observe very different outcomes for two neighbour-
ing regions, Lombardia and Veneto. Although these two regions were
the first to be hit by the COVID-19, they subsequently experienced
very different evolutions of the pandemic, with Lombardia suffering
many more deaths. While the Veneto region started early with a large
testing programme which was effective at identifying positive cas-
es, the Lombardia region started a large testing programme only at
a later date. Finally, the strict restriction to the movement of people
within the country is likely to be one of the reasons for the virus not
to spread to, for example, the South of the country.
Nicola Borri
While the lockdown measures appear to have successfully con-

tained the virus, the economic consequences have been very severe.
The economic situation is very fragile, and critically supported by in-
ternational institutions, like the ECB, which has been able to avoid
the risk of a sovereign debt crisis. This experience confirms the need
for a risk-sharing mechanism in the Eurozone. So far, the actions of
the ECB have filled this hole in the design of the European institu-
tions. However, for the future, it is crucial to think of new, and per-
manent, instruments that guarantee some forms of risk-sharing.
In this light, an objective cost-benefit analysis of lockdown meas-
ures is crucial for at least three reasons. First, to guide and inform
policy makers in their decisions regarding a safe and effective relax-
ation of the lockdown measures after the end of the medical emer-
gency. Second, to guide and inform policy makers in the design of
the social distancing measures that are likely to be in place up until
a vaccine against COVID-19 has been found or that should immedi-
ately become effective in the event of a second ‘wave’ of the pandem-
ic. Third, to understand the overall cost-effectiveness of the different
lockdown measures in the containment and/or prevention of future
pandemics. In fact, because different “nonpharmaceutical interven-
tions” (NPIs) differ from each other in terms of their economic and
psychological cost, it is crucial “to identify the interventions that
most reduce transmission at the lowest economic and psychological
cost” (Haushofer, Metcalf 2020).
This type of analysis remains, however, a daunting task, as it hing-
es upon the evaluation of a causal effect of these measures on the
spread of the pandemic, or the economy (see, for example, Goodman-
Bacon, Marcus, 2020). While challenging, the heterogeneity in the in-
troduction of these measures in Italy – both at the geographical and
the temporal level – and the availability of detailed data on mobility
and deaths at the city level provide researchers with a unique qua-
si-experimental pre-test/post-test design to elicit the causal effects
of the lockdown.

Nicola Borri
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Portfolio Effects
of Cryptocurrencies During
the COVID-19 Crisis
María de la O. González
University of Castilla-La Mancha, Spain
Francisco Jareño
University of Castilla-La Mancha, Spain
Frank S. Skinner
Brunel University London, UK
Abstract We investigate the performance of optimised three asset portfolios com-

prised of stocks, bonds and a cryptocurrency or gold for the period immediately before
and during the COVID-19 financial crisis. We compare the performance of these portfolios
with a two-asset cash portfolio comprised of stocks and bonds. Cryptocurrencies have
the potential to control risk as most portfolios that include cryptocurrencies consistently
experienced risk no greater than 50 basis points above the risk experienced by cash
portfolios. However, there is no free lunch. While three asset portfolios can control risk,
they also have a lower return per unit of risk.
Keywords Portfolio Optimization. Bitcoin. Cryptocurrency. Altcoin. Gold.
Summary 1 Introduction. – 2 Cryptocurrencies. – 3 Investment Potential of Cryptocurrencies.

– 4 Conclusions.

ISBN [ebook] 978-88-6969-442-4
Open access 149
DOI 10.30687/978-88-6969-442-4/011
María de la O. González, Francisco Jareño, Frank S. Skinner
Portfolio Effects of Cryptocurrencies During the COVID-19 Crisis
1 Introduction
On May 22, 2010, Laszlo Hanyecz reported that he bought two medi-
um sized pizzas from Papa John’s for 10,000 Bitcoins.1 Ten years lat-
er, the price of a Bitcoin closed at $9,238 suggesting that this trans-
action would then be worth more than $92 million. Such a huge rise
in value attracts speculative interest leading to the introduction of
very many competing products and consequently to the development
of a whole new asset class we now call ‘cryptocurrencies’. Nowadays,
there are some 2,700+ cryptocurrencies with an overall market val-
ue of more than $250 billion.
As this market is in its infancy, many questions arise regarding the
purpose, value, and use of cryptocurrencies. The academic literature
notes the issues with governance and the association of cryptocur-
rencies with criminality (Corbet et al. 2019), while much of the liter-
ature examines the diversification, safe haven and hedging proper-
ties of cryptocurrencies using a variety of econometric techniques.2
From this literature we understand that cryptocurrencies work best
as safe havens and for portfolio diversification and less so for hedg-
ing strategies. González, Jareño and Skinner (2020) examine the sta-
tistical connectedness between Bitcoin and other popular cryptocur-
rencies finding substantial amounts of co-movements in the long and
short run amongst the top ten largest cryptocurrencies. This chap-
ter contributes by examining the role cryptocurrencies can play as
an asset class added to traditional portfolios. More specifically, we
examine the role cryptocurrencies can play in moderating the risk
or enhancing the return of traditional cash portfolios comprised of
stocks and bonds during the run up to and after the heart of the COV-
ID-19 inspired financial crisis.
To accomplish this task, we first describe nine different cryptocur-
rencies. We then review the performance of cryptocurrencies from
February 5, 2018 to May 15, 2020 thereby incorporating the COV-
ID-19 crisis. Recognising that the COVID-19 crisis presents an op-
portunity to discover if cryptocurrencies can play a role of either im-
proving investment performance or controlling risk or both, we form
portfolios of stocks and bonds as of January 1, 2019. We then meas-
ure the actual return and risk experiences of this portfolio and com-
pare them to the actual return and risk once a cryptocurrency such
as Bitcoin is added to the cash portfolio. We do this for the top nine
cryptocurrencies, namely Bitcoin, Ethereum, Ripple, Bcash, Tether,
Litecoin, Eos, Bfinance and Tezos. We also incorporate Gold into our
1 See https://bitcointalk.org/index.php?topic=137.msg1195#msg1195.
2 Bouri et al. (2017), Shahzad et. al. (2020), and Baur and Hoang (forthcoming) are
examples.

analysis for comparison purposes. After discussing our results, we

then draw conclusions.
2 Cryptocurrencies
As a class, cryptocurrencies perform all the basic functions of a cur-

rency, including representing a store of value, a medium of exchange
and a common denominator to measure value of goods and servic-
es. In contrast to traditional currencies, cryptocurrencies are not
issued by a central bank and so do not derive their value as being
backed by the resources of the issuing authority’s credit. Instead, the
value is supported by technology that makes it impossible to create
unauthorised units of a given cryptocurrency. For some cryptocur-
rencies, supply is determined by miners, traders who solve complex
mathematical problems to earn new cryptocurrency coins. The in-
teraction between the demand and supply of a given cryptocurrency
determines its value. All cryptocurrencies are convertible into tradi-
tional currencies on cryptocurrency exchanges at rates determined
by open and transparent transactions. While the above is common
to most types of cryptocurrencies, each one has a different price as
the technical structure of each cryptocurrency is different. There-
fore, our first task is to describe Bitcoin and outline how each of the
remaining cryptocurrencies in our sample is different.
2.1 The Main Type of Cryptocurrencies
Table 1 reports the nine cryptocurrencies we examine in this chap-

ter. On May 15, 2020, Bitcoin, with a market capitalisation of near-
ly $175 billion and with a 24-hour trading volume of more than $50
billion, dominates the rest of our sample in terms of size and liquid-
ity. Meanwhile, Tezos has the smallest market capitalisation and the
least liquidity with a market capitalisation of under $2 billion and a
24-hour trading volume of approximately $120 million.
Table 1 This table reports the market capitalisation as a measure of the size
and 24-hour trading volume and circulating supply as indicators of liquidity
of nine top cryptocurrencies as on May 15, 2020
Name Ticker Market Cap Price Volume Circulating Supply

(Billions) (24h-Billions)
Bitcoin BTC $174.72 $9,507.28 $50.24 18,378,018 BTC
Ethereum ETH $22.09 $199.13 $17.94 110,938,751 ETH
Tether USDT $8.83 $1.00 $56.06 8,798,069,379 USDT
Ripple XRP $8.82 $0.20 $2.07 44,112,853,111 XRP

Name Ticker Market Cap Price Volume Circulating Supply

(Billions) (24h-Billions)
Bcash BCH $4.38 $237.94 $3.33 18,407,919 BCH
Litecoin LTC $2.80 $43.21 $4.51 64,735,081 LTC
Binance Coin BNB $2.50 $16.07 $0.35 155,536,713 BNB
EOS EOS $2.39 $2.59 $4.19 922,646,994 EOS
Tezos XTZ $1.78 $2.51 $0.12 710,520,732 XTZ
Total M/A $228.32 N/A $138.80 N/A
Bitcoin is a digital currency. It is the original popular cryptocurren-

cy and holds the market lead in size and acceptance for retail trans-
actions. For example, Amazon accepts bitcoins as payment for gift
cards. Since the development of Bitcoin there has been an explosion
in the number of alternative coins (hereafter altcoins) that seek ways
to improve on Bitcoin. Successful innovations include increasing the
range of applications, increasing the volume, speed and reducing the
cost of transactions and improving the security and governance of
altcoin operating systems.
Ethereum moved beyond being a digital currency by allowing
users to develop their own applications such as online betting and
ticket sales via an open source platform. These decentralised appli-
cations also reduce the likelihood of being hacked by operating on
decentralised networks instead of centralised servers. Like Ethere-
um, EOS uses a decentralised operating system and allows users to
create their own commercial sized applications. However, EOS is al-
so designed to alleviate the scalability issues of Bitcoin and Ethere-
um by being capable of handling millions of transactions per second
without transaction fees. While Tezos is also an Ethereum style de-
centralised system, it distinguishes itself by improving the security
and governance of the system. Tezos rewards coin holders for veri-
fying transactions and contracts thereby reducing the likelihood of
malicious attacks. Governance is improved by empowering coin hold-
ers to vote on proposed updates to the network.
Bcash and Litecoin are direct competitors of Bitcoin by making
some technical adjustments to the block chain technology that drives
cryptocurrency transactions thereby allowing for more transactions
to be processed faster. Ripple is designed to aid financial institutions
to settle global transactions more efficiently and more cheaply. For
example, Ripple can settle up to 200 times more transactions a sec-
ond than Bitcoin. Potentially, Ripple can replace the SWIFT system
currently used by financial institutions as the facilitator of cross-bor-
der transactions between currencies. Ripple can handle millions of
transactions per second, settles transactions in seconds (rather than
days for SWIFT) with a transaction cost of less than $0.01.
Other altcoins seek to compete with Bitcoin by offering servic-
es to coin holders. Bfinance, while having its own coin, is a Tokyo
based cryptocurrency exchange designed to facilitate trading be-

tween cryptocurrency pairs. Like any other exchange, Bfinace offers
limit, market, and stop limit orders as well as listing and delisting fa-
cilities. It has also proved to be a valuable venue for initial coin offer-
ings for new cryptocurrencies. Meanwhile, Tether is a type of sta-
ble coin – meaning that the value of the coin is benchmarked against
another asset. In the case of Tether, the value of one unit is calibrat-
ed to be one US dollar. Originally, this was accomplished by being
convertible to US dollars on a one to one basis. Since then, howev-
er, Tether has been backed by a variety of assets and in practice the
value can fluctuate from one dollar.
3 Investment Potential of Cryptocurrencies
Our choice of beginning and ending dates for our study is dictated
by the need to cover the heart of the COVID-19 crisis and the need
to maximise the number of cryptocurrencies we can examine. We
first selected the top 10 Cryptocurrencies ranked by market capital-
isation from investing.com only to discover that Bitcoin SV did not
started trading until November 2018. As this will give us too few da-
ta points to reliably measure performance, we decided to drop Bit-
coin SV. The next most recently issued altcoin, Tezos, was issued on
February 5, 2018 giving us 220 daily observations to measure start-
ing values we need to measure investment performance quarterly
from January 1, 2019. Accordingly, we collect daily stock, bond, gold
and cryptocurrency prices from February 5, 2018 to May 15, 2020.
Daily cryptocurrency information is from investing.com. To repre-
sent the stock, bond and gold markets we collect the Wiltshire 5000
total return index, the Wiltshire global bond total return index and
gold prices from the Federal Reserve Database FRED. The Wiltshire
5000 is a market weighted index of more than 3,000 US stocks that is
intended to be a very broad indicator of US stock performance. Sim-
ilarly, the Wiltshire Global Bond index has a very broad coverage of
all types of taxable US dollar denominated bonds that reflects the
actual holdings by US institutional investors. Finally, gold prices are
the London daily 15:00 price fixing.
Figures 1a to 1e report daily returns of cryptocurrencies and fig-
ures 2a and 2b report the daily returns of stocks, bonds and gold
from February 5, 2018 to May 15, 2020. Figure 1 clearly shows that
cryptocurrencies can suffer catastrophic daily loses [figs. 1a-e]. Notice
that the daily (not annualized) gains and losses range from plus and
minus 40% prior to the COVID-19 period whereas the corresponding
range in figure 2 is a much more modest plus or minus 3%. Figure 2
clearly illustrates that uncertainty related to COVID-19 began to be
incorporated into the cash markets about the third week of February
2020 [fig. 2]. During this heightened period of uncertainty, unannual-

ized daily stock returns were sometimes greater than 5% and loss-
es were greater than 10%. On COVID-19 day March 12, 2020, most
cryptocurrencies lost approximately one half of their value whereas
equity lost a little more than 10%. Despite a strong rebound, the fol-
lowing day a further catastrophic loss was experienced on Monday
March 16 where most cryptocurrencies lost 10% of their value and
equities 13%. Given these wild gyrations in the financial markets, it
is interesting to determine if we can moderate the risk of investing
in cash assets by adding a cryptocurrency to a cash portfolio.

Figures 1a-e Cryptocurrency Daily Returns. February 5, 2018 to May 15, 2020

Figure 2a Stock and Bond Daily Returns. February 5, 2018 to May 15, 2020
Figure 2b Gold Daily Returns. February 5, 2018 to May 15, 2020
Our testing strategy is as follows. We first measure expected returns

and risk as inputs to determine what portion of each asset should be
included in a three-asset portfolio comprising of stocks, bonds and
an alternative asset such as gold or a cryptocurrency. Using these
inputs, we set a target risk level and then optimise by changing the
portions invested in each of the three component assets to obtain
the highest possible return given the target risk level on January 1,
2019. This optimisation is accomplished via the solver function in
Excel. Using these optimised portions, we then measure the return,
the risk (portfolio standard deviation) and the ratio of return to risk
(hereafter Sharpe ratio) three months later on March 31, 2019 and
compare these actual values to what was promised initially. We then

repeat by rebalancing our initial portfolio using updated risk meas-
ures – the variances and covariances amongst included assets in the
portfolio – on March 31 2019, but retain the initial target returns
and portfolio target standard deviation and then measure the sec-
ond quarterly returns, risk and the Sharpe ratio on June 30, 2019. We
continue rebalancing the portfolio at the beginning of each quarter
to compare to the actual performance at the end of the quarter until
March 31, 2020. To capture the rapid bounce back after March 31,
2020 we rebalance the portfolio on March 31 and measure the per-
formance of this portfolio seven weeks later May 15, 2020.
We use the five-year average, from January 1, 2014 to December
31, 2018, to calculate the expected value for the mean returns of
stocks, bonds and gold. We use the annualised daily averages over the
220 daily observations from February 5, 2018 to December 31, 2018
to calculate expected values for the variances and covariances for
all assets. However, the five year (or part thereof) return of the nine
cryptocurrency returns were incredible and using a similar five-year
average would result in portfolios dominated by cryptocurrencies.
This would defeat the purpose of this study as we wish to examine
how cash portfolios can be improved by including cryptocurrencies
as an additional rather than a substitute asset class in the portfolio.
Therefore, we arbitrarily chose 4% as the target return, which is part
way between the average target return for stocks, bonds and gold at
8, 3.5 and 0.5% respectively.3
Once chosen, the starting values will be used to form a portfo-
lio with a controlled level of risk by minimising risk to a chosen lev-
el. We chose an overall portfolio standard deviation of 9.9% as the
target risk. This is the average five-year standard deviation for the
Wilshire 5000 index up to December 31, 2018, the idea being that
investors are willing to invest some portion of their wealth in cryp-
tocurrencies, provided that this does not result in an expected ma-
jor increase in risk. Using our chosen expected values, we now opti-
mise portfolios by finding the portions invested in each asset that in
combination obtains the highest possible portfolio expected return
based on the expected values, consistent with an overall portfolio
standard deviation of 9.9%.4 Short selling is not allowed so the min-
imum investment in any given asset is zero.
3 We experimented with a range of values for the target cryptocurrency target return
from 0.5% to 5%. Using lower values resulted in very little investment in cryptocurren-
cies whereas using a value greater than 4% lead to portfolios with more than 50% in-
vested in cryptocurrencies. As shown in table 2, the use of a 4% target return allowed is
to form portfolios with a significant, but not dominant investment in cryptocurrencies.
4 We initially set the investment in Equity as 100% and zero for the remaining as-
sets and then optimise.

Table 2 This table reports the initial percentage allocations, expected returns,
variances and covariances from Q1 the first quarter of 2019 to Q6 the second part
quarter of 2020 ending on May 15 based on information prior to the date portfolios
are formed. All figures are in percent
Q1 Cash Gold Bitcoin Ethereum Ripple Bcash Tether Litecoin Eos Bfinance Tezos
Equity 60.3 58.4 44.4 36.5 57.4 59.2 58.4 23.8 33.7 54.2 59.4
Bonds 39.7 21.4 47.2 56.4 40.7 39.2 21.7 67.4 60.4 42.6 39.2
Alternative 0.0 20.2 8.3 7.0 1.9 1.6 19.9 8.8 5.9 3.2 1.4
Q2
Equity 62.4 60.6 43.8 45.4 34.8 60.6 60.6 26.1 35.1 52.2 29.2
Bonds 37.6 20.3 46.6 48.4 57.9 37.5 20.6 65.2 58.7 43.4 64.7
Alternative 0.0 19.1 9.6 6.2 7.3 1.9 18.8 8.7 6.1 4.4 6.1
Q3
Equity 65.1 63.4 49.7 27.1 65.1 64.3 63.3 29.6 35.1 53.9 59.2
Bonds 34.9 18.8 41.6 64.0 34.9 34.2 19.2 61.8 58.4 41.4 37.7
Alternative 0.0 17.8 8.7 8.9 0.0 1.6 17.5 8.6 6.5 4.8 3.0
Q4
Equity 65.8 64.3 55.3 29.4 65.8 64.7 64.0 30.0 36.0 53.9 48.3
Bonds 34.2 18.1 37.5 61.7 34.2 33.6 18.9 61.3 57.4 41.0 46.7
Alternative 0.0 17.5 7.3 8.9 0.0 1.8 17.1 8.7 6.6 5.0 5.0
Q5
Equity 68.6 67.4 57.9 31.9 68.6 67.4 67.0 31.8 37.0 51.3 48.6
Bonds 31.4 16.5 34.7 58.8 31.4 30.8 17.3 59.1 55.9 42.5 46.0
Alternative 0.0 16.1 7.4 9.3 0.0 1.8 15.7 9.1 7.0 6.3 5.4
Q6 (Part)
Equity 40.6 32.9 20.9 40.6 40.6 30.9 40.6 40.6 40.6 40.6 40.6
Bonds 59.4 36.3 70.6 59.4 59.4 65.3 30.1 59.4 59.4 59.4 59.4
Alternative 0.0 30.8 8.5 0.0 0.0 3.9 29.3 0.0 0.0 0.0 0.0
The initial allocations are reported in table 2. Based on the expect-

ed returns, variances and covariances, these allocations are optimal
as they give the highest possible returns given the target of holding
the overall standard deviation of the portfolio to 9.9%. The portion
invested in Gold and Cryptocurrencies do vary substantially. For ex-
ample, the initial allocation for the first quarter has 20.2% invested
in gold and 1.4% invested in Tezos. It is interesting to note that on-
ly Gold and Tether regularly enter the rebalanced portfolios with al-
locations of between 15 to 30%. All other cryptocurrencies have al-
locations of less than 10%. Also, for the part quarter from April 1 to
May 15, when the markets bounced back from the heart of the COV-
ID-19 crisis, six cryptocurrencies do not even enter the rebalanced
portfolios as, clearly based on past data, they were ‘too risky’. Includ-
ing them would results in a rebalanced portfolio with a standard de-
viation greater than 9.9%.

Table 3 This table reports the mean, standard deviation SD and Sharpe ratio quarterly
from Q1 the first quarter of 2019 to the end of the part second quarter of 2020 on May
15, 2020. The means and standard deviations are annualised percent rates
Q1 Cash Gold Bitcoin Ethereum Ripple Bcash Tether Litecoin Eos Bfinance Tezos
Mean 39.6 36.5 36.0 31.7 37.2 39.8 35.4 50.4 41.2 41.2 42.9
SD 7.8 7.9 9.9 7.4 7.6 7.9 7.9 8.8 7.4 7.4 8.2
Sharpe 5.1 4.6 3.6 4.3 4.9 5.0 4.5 5.7 5.6 5.6 5.3
Q2
Mean 18.0 22.4 58.2 36.7 27.7 26.0 13.8 45.1 27.9 32.5 18.8
SD 7.1 7.2 7.7 6.7 7.8 6.7 7.4 9.0 7.6 6.7 7.7
Sharpe 2.5 3.1 7.5 5.5 3.5 3.9 1.9 5.0 3.7 4.8 2.5
Q3
Mean 4.0 4.7 -9.0 -11.6 4.0 -0.1 3.3 -18.9 -12.3 -9.5 3.2
SD 9.9 9.8 10.2 9.0 9.9 9.9 9.7 9.1 8.7 9.4 10.0
Sharpe 0.4 0.5 -0.9 -1.3 0.4 0.0 0.3 -2.1 -1.4 -1.0 0.3
Q4
Mean 22.2 22.3 14.7 -0.9 22.2 20.5 21.5 -0.5 8.8 15.6 25.7
SD 6.1 5.8 6.6 5.6 6.1 6.1 5.9 6.3 5.5 6.0 6.0
Sharpe 3.7 3.8 2.2 -0.2 3.7 3.4 3.6 -0.1 1.6 2.6 4.3
Q5
Mean -64.0 -59.9 -57.2 -27.1 -64.0 -62.4 -63.1 -30.0 -37.6 -49.4 -40.4
SD 39.6 41.1 39.4 30.5 39.6 40.5 38.4 29.1 29.4 36.8 35.7
Sharpe -1.6 -1.5 -1.5 -0.9 -1.6 -1.5 -1.6 -1.0 -1.3 -1.3 -1.1
Q6
(Part)
Mean 55.6 77.1 72.3 55.6 55.6 54.2 48.8 55.6 55.6 55.6 55.6
SD 16.3 15.1 12.4 16.3 16.3 13.4 15.8 16.3 16.3 16.3 16.3
Sharpe 3.4 5.1 5.8 3.4 3.4 4.1 3.1 3.4 3.4 3.4 3.4
Table 3 reports the mean, standard deviation and the Sharpe ratios
for the twelve portfolios formed quarterly between January 1, 2019
and May 15, 2020. Recalling that all portfolios were calibrated to
have an expected standard deviation of 9.9%, we can see that the
actual risk experienced by these portfolios were sometimes far high-
er than expected based on the prior data. For all of 2019, the cash
portfolio realised a standard deviation that was the same as expect-
ed or lower, but from January 1 to May 15, 2020, the cash portfolio
had a much higher realised standard deviation clearly reflecting the
heightened risk associated with COVID-19.
First, looking at the 2019 calendar year, with few exceptions, the
risk of a cash portfolio is not materially increased by the inclusion of
a third asset. In fact, there are only four out of a possible 36 instanc-
es where risk increased by more than 100 basis points and eight of
36 instances where risk increased by more than 50 basis points over
the cash portfolio. Meanwhile, in nearly half, 17 of 36 instances, risk
is less, sometimes by substantial amounts, than the risk experienced

by the cash portfolio. Bitcoin seems to create the most excess risk,
followed by Litecoin and Tezos. In contrast, Bcash and Tether consist-
ently realise risk no great than 50 basis points than that experienced
by cash portfolios and Ethereum and Bfinance consistently have a re-
alised risk lower than the risk of the cash portfolio.
For the COVID-19 period from January 1, 2020 to March 31, 2020,
we find that including a cryptocurrency asset increases risk only in
the case of Bcash, whereas the remaining cryptocurrencies reduced
risk sometimes by substantial amounts. The worst performing asset
was gold as inclusion of gold resulted in a 150 basis point increase in
risk while the corresponding figure for Bcash was 90 basis points. It
is difficult to draw any conclusions regarding the bounce back peri-
od as it includes only seven weeks of information and six of the nine
cryptocurrencies do not even enter the portfolios as they were too
risky based on data from the COVID-19 period. However, we do ob-
serve that the three cryptocurrencies that did enter the portfolios
all have a lower risk than the cash portfolio.5
Finally, we examine the trade-off between risk and return by ex-
amining the Sharpe ratio where the higher the ratio the greater the
reward for taking risk. Here we see that in 21 out of a possible 36 in-
stances inclusion of a cryptocurrency results in a lower Sharpe ra-
tio. For the COVID-19 period, the Sharpe ratio is always higher or the
same as the cash portfolio and all ratios are negative.
4 Conclusions
We conclude that cryptocurrencies have the potential to control risk

as most cryptocurrencies consistently experienced risk no higher
than 50 basis points of the risk experienced by cash portfolios com-
prised of stocks and bonds. However, some cryptocurrencies appear
to control risk less well than others. In particular, Bitcoin appears to
be the least stable followed by Litecoin and Tezos. On the other hand,
two cryptocurrencies, Ethereum and Bfinance combined with cash
assets result in portfolios that have a realised risk that is less than
5 It is interesting to speculate whether an investment in gold or a cryptocurrency would

form a hedge during the heart of the COVID-19 financial crisis from Thursday March 12
to Monday March 16, 2020. We note that except for Gold and Tether, all cryptocurrencies
moved in the same direction during these three working days as the stock market experi-
enced losses on Thursday and Monday and an increase on Friday. This suggests that dur-
ing this critical period most cryptocurrencies could form a hedge had the investor short
sold the corresponding cryptocurrency. To confirm this, a study of hedge portfolios formed
of long bonds and stocks with a short position in the candidate cryptocurrency designed to
minimise portfolio variance needs to be conducted – a task beyond the scope of this chapter.

the risk of the corresponding cash portfolio. However, there is no free

lunch because clearly, while risk can be controlled, it comes at the
expense of a lower Sharpe ratio suggesting that the reward for tak-
ing on the risk is higher when we ignore cryptocurrencies in forming
portfolios. More specifically, the two cryptocurrencies that best con-
trol risk, Ethereum and Bfinance, also often have Sharpe ratios that
were lower than the corresponding Sharpe ratio for cash portfolio.
These results add to the literature by finding that while cryptocur-
rencies can control the risk of well diversified cash portfolios, not all
cryptocurrencies are able to do this during the run up to and during
the COVID-19 financial crisis. Our findings implies that investors seek-
ing to control the risk of well diversified cash portfolios should consid-
er altcoins, particularly Bfinance and Tether, rather than Bitcoins but
all the while realising that a reduction in risk is likely to be accompa-
nied by a lower return. In contrast, the literature mostly concentrates
on Bitcoin finding some evidence that bitcoins can effectively diversi-
fy cash portfolios in the case of extreme events (Bouri et al. 2017) but
gold appears to have more stable diversification properties than Bit-
coin (Shahzad et. al. 2020). In contrast, we find Gold did not control risk
well during the height of the COVID-19 financial crisis and there were
better performing altcoins than Bitcoin. Perhaps the variation in di-
versification effectiveness can be traced to the structure of an altcoin.
Altcoins designed to attract the interest of professional investors by in-
corporating the altcoin to the trading on an exchange – Bfinance – or
tied to another asset – Tether or provide ancillary services – Ethereum
lead to more rational trading and less speculation resulting in more ef-
fective diversification than other alternatives.
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Part 5
Commodities and Real Estate Markets
163
Will COVID-19 Change Oil

Markets Forever?
Yelena Kalyuzhnova
Julian Lee
Bloomberg
Abstract The oil market is experiencing unprecedented dislocations in 2020. The in-
dustry is trying to cope with the biggest slump in demand ever recorded, as governments
around the world try to tackle the COVID-19 pandemic. Will oil demand return to a pre-
pandemic ‘normal’, or will the outbreak hasten a peak in oil demand? Will patterns of
oil consumption change and, if so, what pressures will that place on an industry already
struggling to adapt to growing environmental concerns and a demand for carbon-free
energy? The paper will explore the options.
Keywords Oil prices. Oil markets. Energy demand. Energy supply. OPEC.
Summary 1 Introduction. – 2 The effect of the COVID-19-Pandemic on Oil Markets. –

3 The Effect of the COVID-19-Pandemic on Transportation. – 4 Conclusion.
1 Introduction
Economic and social upheavals always affect oil markets and the COVID-19
pandemic is no exception. Short-term disruption to the consumption of fuels
and plastics derived from oil is inevitable, as the spread of the disease dis-
rupts economic activity and trade, while the response of governments world-
wide sees large parts of the global population subjected to some form of cur-
tailment of movement. The rapid contraction in economic activity, the collapse
of trade, and the dramatic increase in the unemployment rate are all with-
out precedent. So, too, is the collapse in oil demand and the subsequent cut

ISBN [ebook] 978-88-6969-442-4
Open access 165
DOI 10.30687/978-88-6969-442-4/012
Yelena Kalyuzhnova, Julian Lee
in supply, both voluntary and in response to economic forces (Fer-

nandes 2020). The main objective of this chapter is to explore how
the COVID-19 pandemic might affect oil demand in both the short and
long term and the implications that has for the oil industry.
Difficult though these short-term dislocations are to overcome, the
more fundamental question is what will be the long-run consequenc-
es of the pandemic for the oil market. Will the fear that has been in-
stilled in populations required to shelter at home for weeks on end
and keep their distance from fellow human beings dissipate quickly
as restrictions are eased, or will it result in fundamental and long-
lasting changes in behaviour that will impact global demand for fu-
els? Will the experience of a long period of remote working and vir-
tual meetings change the behaviour of companies and their staff, or
will it reinforce the importance of face-to-face contact and interna-
tional business travel?
2 The Effect of the COVID-19-Pandemic on Oil Markets
Some experts are suggesting that “the COVID-19 crisis accelerates

what was already shaping up to be one of the industry’s most trans-
formative moments” (Barbosa et al. 2020). Focusing on the pressure
placed on the industry, it is useful to look at the broader environment.
The long megacycles of shifting demand and supply tend to have wide
swings. Without doubt, the combination of demand disruption due to
the pandemic as well as excess supply created a deep crisis for the
industry. Almost a fifth of global demand for oil is expected to disap-
pear during the second quarter of 2020 and it is not expected to return
to pre-pandemic levels before the end of 2021. All three of the major
forecasting agencies – The International Energy Agency (IEA), the Or-
ganization of Petroleum Exporting Countries (OPEC) and the US Ener-
gy Information Administration (EIA) – now agree that the world faces
its biggest-ever slump in oil consumption, after governments imposed
movement restrictions on billions of people to combat the coronavi-
rus. “The scale of the demand hit means that despite producers im-
plementing unprecedented output cuts, stockpiles will soar this year”
(Lee 2020b). This unprecedented stockbuild will create an overhang
that will suppress prices even as demand recovers, until it is drawn
down and inventories return to more normal levels. The forecasts of
the IEA indicate that the world will consume about 1.7 billion barrels
less oil in the second quarter of 2020 than it did during the same pe-
riod of 2019. Over the whole of 2020 and 2021, the volume of lost de-
mand compared with pre-pandemic forecasts balloons to about 5.4
billion barrels, equivalent to the entire proven oil reserves of Mex-
ico [fig. 1]. In addition, the decades-long upward movement in crude
oil demand has been undermined by a repeated pattern of declining
oil-intensity of GDP (oil consumption/GDP) followed by a brief and in-

complete recovery in which intensity did not return to its pre-decline
levels (Fagan 2020). The oil intensity of the global economy been de-
clining since the 1980s and 1990s mainly in non-OECD countries as
well as in some OECD countries.
Figure 1 The effect of the COVID-19 pandemic on world oil demand
The unprecedented collapse in oil demand has required a similar-

ly unique response from oil producers, who simply could not keep
pumping at pre-pandemic rates without filling all the available stor-
age capacity for crude and refined products. Storage tanks at key
hubs like Rotterdam, Singapore and Saldanha Bay were filling fast
and any available space had already been contracted. The industry
was forced to turn to the more expensive option of storing oil in tank-
ers at sea. Oil analytics firm Vortexa Ltd estimates that the volume
of crude oil in floating storage soared to more than 180 million bar-
rels, over three times its average level in 2019, as oil demand tum-
bled [fig. 2]. That will start to draw oil out of stockpiles, but the over-
hang is huge. The volume of crude oil stored in tankers rose to more
than 200 million barrels by June 19, according to data from analytics
firm Vortexa supplied via Bloomberg (Bloomberg 2020). That is four
times as much as at the same time in 2019 (Lee 2020e).

Figure 2 Crude stored on tankers at sea soared as oil demand collapsed
In April 2020 the world oil price made history. US West Texas Inter-
mediate (WTI) crude turned negative for the first time in the 160-year
history of the oil industry, as holders of contracts for future delivery
sought to unload them before they expired and they had to take de-
livery of physical barrels [fig. 3].
Figure 3 West texas intermediate crude price in early 2020

The normal buyers of such contracts faced difficulties of their own,

with almost no available storage capacity at the contract’s delivery
point of Cushing, Oklahoma. “Dismissing the historic move in the
May contract for West Texas Intermediate crude as ‘more of a finan-
cial thing than an oil situation,’ as U.S. President Donald Trump did,
misses the point” (Lee 2020a). Although the negative oil price was a
peculiarity of the WTI contract, it was also a wake-up call to oil pro-
ducers in America that they had to get serious about reducing their
own supply, rather than simply waiting for others to make the cuts that
would rebalance supply and demand and allow them to keep pumping.
Global financial markets have been hit severely by the oil price col-
lapse. Two serious shocks, the collapse of oil prices two months af-
ter the onset of the COVID-19 epidemic in Wuhan city as well as af-
ter the unexpected decision of Saudi authorities to offer record price
discounts of as much as $13 against regional benchmarks to their
main customers, sent worldwide stock markets into free fall (Sharif,
Aloui, Yarovaya 2020).
Despite record output cuts of almost 10 million barrels a day
agreed by the members of OPEC and a group of allied oil produc-
ers, combined with unprecedented reductions in supply from pro-
ducers in the US, Canada and other countries outside the so-called
OPEC+ group, inventories have continued to build. US commercial
crude stockpiles hit a record high in June, surpassing the previous
peak set in 2017 [fig. 4].
Figure 4 US commercial crude stockpiles hit a new high in June 2020
In the short term, the only way to stabilise the oil market was to meet
the biggest ever collapse in demand with the largest reduction in sup-
ply. The 23 members of the OPEC+ group of countries, which joins the
OPEC members with ten non-OPEC countries, including Russia, Mex-

ico, Kazakhstan and Azerbaijan, met by video conference in April and
eventually agreed to reduce their collective oil production by an initial
9.7 million barrels a day in May and June 2020 and to taper those cuts
in two steps, with output restrictions that would last until April 2022.
Oil producing countries outside this group were reluctant to make
formal commitments to cut output, but many said that their indus-
tries would cut production in response to market forces, with the Ca-
nadian oil sands and the US shale oil sectors seen to be particular-
ly vulnerable to the downturn. High operating costs and long routes
to markets made operations in Canada’s Alberta Province vulnera-
ble, while the constant need to drill new wells to offset steep decline
rates at US shale wells put that sector at risk.
The reluctance to cut production and close wells is understanda-
ble. Most of the costs of producing oil are already sunk by the time
crude starts flowing out of the ground; the operating costs of keep-
ing a well flowing are usually only a small fraction of the total cost
and oil prices have to fall to very low levels indeed to stop covering
cash operating costs. Furthermore, shutting a well is not cost-free.
Getting them pumping again can be even more expensive. The deci-
sion to shut the well will involve a number of factors such as the cost
and technical challenges of restoring the wells back to pre-curtailed
volumes (Adams-Heard, Wethe, Crowley 2020).
US oil production had fallen by 2 million barrels a day by mid-
June from a peak of 13.1 million barrels a day in mid-March, before
the pandemic caused oil prices to tumble, according to preliminary
weekly data from the EIA. The number of rigs drilling for oil in the
US has slumped to its lowest level since June 2009, figures from Bak-
er Hughes show; a drop of 72% in the space of 14 weeks [fig. 5].
Output cuts are doing their job, with forecasts from the IEA (IEA
2020) and others indicating that demand will be running ahead of
supply in the second half of 2020, as countries begin to recover from
the worst effects of the lockdowns imposed to combat the COVID-19
pandemic and production rates remain curtailed.
While production cuts have helped to balance oil supply and
demand on a day-to-day basis, the global oil industry still faces a
daunting task. The most recent forecast from the IEA shows demand
growth recovering more slowly than the group previously thought.
“Global demand will still be below pre-pandemic levels by the end of
2021, never mind this year” (Lee 2020d).

Figure 5 Domestic US crude production has tumbled
3 The Effect of the COVID-19-Pandemic on Transportation

The COVID-19 pandemic has severely impacted travel, by road, rail,
sea and air. As the pandemic spread, individual behavioural chang-
es took place, partly the result of individual choices and partly in re-
sponse to government-imposed restrictions on movement and eco-
nomic activity. Working from home became the normal practice for
those who could do so, commuting to work virtually ceased, public
gatherings were banned and international travel severely curtailed.
People stopped driving, flying, or travelling on public transport.
Data from FlightRadar24, which tracks both commercial and non-
commercial air traffic, show that by mid-June, even though the num-
ber of commercial flights worldwide had doubled since the depth of
the pandemic, it was still down by about 60% from the pre-virus lev-
el (Reed 2020) [fig. 6].
One of the biggest questions that remains unanswered is to what
extent travel behaviour will return to its pre-COVID-19 normal once
restrictions are lifted. Congestion on Chinese city streets rebounded
quickly after lockdowns were eased and congestion even surpassed
pre-lockdown levels, as people chose to use private cars to get to work
rather than crowded transit systems. But high-frequency journey-time
data from TomTom Traffic Index show that the return of congestion
is not uniform [fig. 7].
The congestion data show that roads are still much emptier in the
evenings and during the middle of the day during the weeks and that
traffic levels remain well below pre-pandemic levels during week-
ends. In other parts of the world, where lockdowns are only gradu-
Figure 6 Commercial flights are recovering, but remain 60% below pre-COVID-19 levels
Figure 7 Congestion has returned to Beijing streets during commuting hours, but not outside them.
The chart shows average congestion for working days (left) and weekends (right)
ally being eased, similar patterns are emerging. These may change
as a greater range of economic activities are permitted and leisure
travel in particular can be expected to increase as more leisure op-
portunities become available.
Whether the loss of oil demand is a brief anomaly, as it was dur-
ing the financial crisis of 2008-09, or reflects a structural change
in consumption remains to be seen. It is too early yet to determine
whether the pandemic will alter fundamentally people’s attitudes to-
wards air travel, or commuting to work, or whether it will lead com-

panies to reassess working-from-home opportunities for their staff,
or international corporate travel to attend meetings and events. UBS
Group Chief Operating Officer Sabine Keller-Busse said that as many
as a third of its employees could work remotely on a permanent ba-
sis (Halftermeyer, Lacqua 2020).
Bloomberg economists Jamie Rush, Maeva Cousin and David Pow-
ell see a rapid economic recovery in Europe running out of steam.
The big questions here are how quickly the rebound will be and how
much social distancing will be an obstacle for this (Rush et al. 2020).
By mid-June of 2020, Ben Luckock, co-head of oil trading at Trafig-
ura Group told Bloomberg News that demand for crude was already
back to 90% of normal levels as countries emerge from pandemic-re-
lated lockdowns, but that returning to normal could prove difficult.
He believes that 5% (of the remaining 10%) will be recovered in a
few months, although he expressed his worries that complete recov-
ery to pre-crisis levels may be difficult. There are many obstacles for
this and some ‘new normal’ patterns like working-from-home as well
as reduced air travels (Blas 2020).
4 Conclusion
If long term oil demand settles at a level some 5% lower than the
pre-COVID-19 trajectory, the implications for the oil sector will be
significant. Investment in the oil projects needed to provide the pro-
duction capacity in the coming decade are not being made. Oil com-
panies from the supermajors like ExxonMobil and Royal Dutch Shell
to the small operators in the US shale patch have all slashed their
budgets. Shell has cut its dividend for the first time since the Second
World War (Hurst 2020).
The combination of lower oil demand and green post-COVID-19
stimulus packages could transform the energy landscape. Germa-
ny has committed 130 billion euros ($145 billion) to pandemic recov-
ery, with about 30% to be spent on activities that will cut emissions.
That compares with about 15% of the stimulus money injected into
the global economy during the 2008-09 financial crisis that went to
green initiatives (Rathi, 2020).
Goldman Sachs analysts see spending on renewable power over-
taking oil and gas drilling for the first time in 2021. Clean energy af-
fords a $16 trillion investment opportunity through 2030 Renewa-
bles policies including biofuels which will account for about a quarter
of all energy spending next year. This is up from about 15% in 2014,
driven in part by diverging costs of capital, as borrowing rates have
risen to as high as 20% for hydrocarbon projects compared with as
little as 3% for clean energy (Murtaugh 2020).
The current disequilibrium in global energy markets is a signal that

the post-COVID-19 new energy normal would be characterised by a
more uncertain future for the oil and gas industry. To a certain extent,
the COVID-19 Pandemic has and will reshape of our energy future. The
oil and gas industry will experience short and long term impacts from
the crisis to which it will have to adjust, with the potential for future
oil demand to be significantly reduced from pre-pandemic forecasts.
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Real Estate and the Effects

of the COVID-19 Pandemic
in Europe
Gianluca Mattarocci
Università degli Studi di Roma «Tor Vergata», Italia
Simone Roberti
Colliers International, Italia
Abstract The real estate industry was severely affected by the COVID-19 in both the
residential and the commercial sectors due to travel and site-visit limitations, rent sus-
tainability issues and a decrease of or higher uncertainty about disposable income.
During the lockdown, houses became more important and were analysed in depth. It
can be assumed that a new demand could emerge after this crisis making households
looking for more comfortable houses since this asset will increase its importance for
living and working. Similarly, the commercial real estate sector will change due to lower
rent sustainability. However, the main expected change is related to the building type
and the standards requested by tenants in the new economic environment.
Keywords Real Estate. Residential. Commercial. Pandemic. COVID-19.
Summary 1 Introduction. – 2 Residential Real Estate. – 3 Commercial Real Estate. –

3.1 Office Market. – 3.2 Retail. – 3.3 Industrial and Logistic Real Estate. – 3.4 Hospitality.
– 4 Conclusion.
1 Introduction
After the SARS in 2003, the literature started to study the economic impact of
similar diseases by considering not only the social cost of the deaths related
to the infection but also the negative effects of government policies that aimed
to reduce infection and protect lives (Keogh-Brown et al. 2010). Theoretical

ISBN [ebook] 978-88-6969-442-4
Open access 177
DOI 10.30687/978-88-6969-442-4/013
Gianluca Mattarocci, Simone Roberti
Real Estate and the Effects of the COVID-19 Pandemic in Europe
models applied to Europe tried to test the impact of a pandemic sim-

ilar to the Spanish influenza in 1918-19. Results showed sector and
country differences but assumed a short-term effect that would last
a few quarters (Jonung, Roeger 2006). The coronavirus disease has
unique features with respect to previous pandemics because it is the
first time that we are experiencing such an event in a globalised and
interconnected world. Preliminary analysis of the data available to
date shows that, during the lockdown period, consumption behaviour
changed significantly with negative effects on some sectors (food and
beverage, hospitality, etc.) and positive effects on others (e-commerce,
healthcare, etc.) (Backer et al. 2020). These effects will be long last-
ing because companies will require several months to recover from
the losses suffered during the lockdown and customers will require
time in order to adapt themselves to the new economic environment.
The real estate sector was severely affected by the pandemic since
commercial tenants had lower revenues for paying rents during the
lockdown period and households had lower income to pay rents or
mortgages. Moreover, there is a change in the perception of the effi-
cient use of space that may have an impact on the demand for exist-
ing and new real estate assets (Taltavull 2020). This chapter analyses
the real estate market by considering separately residential (section
2) and commercial (section 3) real estate. The focus will be on Eu-
ropean real estate markets and the analysis will consider the differ-
ent approaches adopted by policy makers for managing the pandem-
ic and the lockdown period.
2 Residential Real Estate
The analysis of household residence in Europe shows significant dif-

ferences among countries [fig. 1].
On average, more than 70% of citizens own their house (with or
without an outstanding mortgage). But the percentage is significant-
ly lower in some North and Central European countries (e.g. Switzer-
land, Germany, and Austria) and higher in some East European coun-
tries (e.g. Croatia, Bulgaria, Romania, and Slovakia) where less than
20% of citizens are renters.
Looking at the type of dwelling, on average less than 50% of Eu-
ropeans are living in a flat but this percentage is significantly high-
er in the main cities compared to the countryside [fig. 2].
Countries like Switzerland, Latvia and Spain have more than 60%
of citizens living in a flat while other North European countries (like
Ireland, UK and Netherlands) have more than 80% of citizens living
in detached and semi-detached or terraced houses.
The lockdown experience showed some limitations of the exist-
ing housing stock. People that experienced ‘smart working’ often
Figure 1 Population distribution by tenure status in 2019. Source: Eurostat data processed by the Authors
Figure 2 Population distribution by dwelling type in 2019. Source: Eurostat data processed by the Authors

suffered from the lack of space necessary for working from home.
A dedicated table and comfortable seat for working appeared to be
necessary. The entrance of the flat was eliminated in some develop-
ments and now could be repurposed, as a ‘decontamination room’.
Therefore, demand is expected to change in the near future with an
increase of the average size of houses. Families with children, in
particular, will look for independent real estate units (detached and
semi-detached houses) with gardens and terrace that may make liv-
ing at home more enjoyable. Households that expect to work from
home (even only for few days per week) may have an incentive to buy
outside downtown areas where prices per square meter are general-
ly lower, making it possible to buy a bigger house.
However, the pandemic had a negative effect on the disposable in-
come of individuals that were obliged to stop working during ‘phase
one’ of the lockdown, or are facing higher redundancy risk or sala-
ry cuts (Mann 2020). Moreover, the economic crisis and the credit
conditions are getting worse in the short term which may reduce the
number of transactions in the real estate market.
3 Commercial Real Estate
3.1 Office Market
The office market has slowly been changing in the last years with
an increase of flexible spaces and a more intensive use of desks (i.e.
less dedicated desks), causing a decline in the square metre per em-
ployee. The main driver was cost reduction. Therefore, companies
changed the style and the layout of offices and landlords had to adapt
to the new requirements of the market with a switch from the mod-
el of small, independent rooms to open spaces, with a lot of common
areas, to minimise the consumption of space per employee [fig. 3].
The demand for office space in the last years gave more importance
to ancillary services (conference rooms, canteens, fitness centres, and
so on) that could represent a benefit for the employees and increase
job satisfaction and corporate loyalty (Cushman & Wakefield 2020).
During the COVID-19 emergency many firms were obliged to increase
the use of smart working solutions in order to reduce the risk of infection
for their employees and avoid stopping their business during the lock-
down. Data showed a huge increase in home working and, independent-
ly of the country selected, from 60% to 70% of the European companies
used smart working solutions for the months of April and May (JLL 2020).
The social distancing rules have changed the layout of the office,
increasing the space necessary for each employee. The impact of this
change could be disruptive for the industry because companies will be
obliged to reduce people that will be in the office at the same time by
Figure 3 Average office square metres per employee in the main European cities in 2019.
Source: Cushman & Wakefield data processed by the Authors
applying rotation and smart working. Otherwise, they will be obliged

to leave the current buildings and move to new and bigger ones. More-
over, companies may be encouraged to avoid downtown buildings (or
towers) and may prefer to look for secondary office areas where big-
ger buildings are more affordable. This could become a new trend if
employees start moving out of urban areas and prefer to drive to their
office. In some markets, shared workspace companies, like Regus or
WeWork, have grown significantly (e.g. Greater Paris). They offer an
alternative model for big corporations that may opt to rent desks in co-
working spaces located in the suburbs near to residential areas where
employees live. This may be more cost effective than investing new
money in developing owned corporate real estate (Knight Frank 2019).
3.2 Retail
The retail sector has been experiencing a significant change in the last
decade. This was characterised by a crisis of the commercial centres
not located in prime areas and a decrease in the volume of the new
investments in some of the major locations in Europe. A comparison
between commercial retail property investment and consumer online
spending shows that countries with higher rates of their population
Figure 4 European retail volume vs Online spending. Source: RCA and Eurostat data processed by the Authors
spending online have weaker retail property investment volumes. The

ongoing shift away from bricks-and-mortar retail in some areas has a
direct impact on commercial property market trends (RCA 2019) [fig. 4].
The COVID-19 and the lockdown measures have had an effect on
almost all retail activities causing a significant decrease of annual in-
come and impacting on the sustainability of rents paid to landlords.
Groceries and supermarkets were the only businesses that saw an
increase in monthly revenues following the lockdown. The real es-
tate market showed some interest in developing such businesses in
areas previously not served (Savills 2020).
During the lockdown, consumers’ behaviour has changed and
some changes are expected to last: an increased importance of food
and drinks expenditure for home consumption (in supermarkets) and
the use of e-commerce solutions. Restaurants and bar are expected to
suffer in the short and medium-term until the contagion control meas-
ures will be permanently removed. This is because the smart work-
ing (or more precisely home working) and travel restrictions affect
negatively the demand. Moreover, social distancing measures reduce
the number of customers that can be served at the same time. The
forced experience of using e-commerce during the lockdown period
to buy goods may represent a disruptive event for the economy, with
more customers developing a preference for the internet channel.

Tricity
Hamburg
Dusseldorf
Trieste
Genoa / La Spezia
Sines
Algericas Athens
Main logistic ports in Europe Ports that showed the highest increase from 2010
Geographical areas with the higher concentration of logistic ports
Figure 5 European Logistic and Industrial Hubs. Source: Colliers International, 2015
3.3 Industrial and Logistic Real Estate
Industrial and logistic real estate in Europe showed an increase in

the volume of take-ups in areas with a good connectivity by ship,
plane, or train that represented the main market for new investments
(Mattarocci, Pekdemir 2017) [fig. 5].
In 2019, the main global gateways were located in Benelux, Ger-
many and UK (the so called ‘blue banana’). But there are new mar-
kets that are growing as critical supply chain links and regional hubs
outside of this area in Northern, Eastern and Southern Europe (Cush-
man & Wakefield 2020).
During COVID-19 the industrial and logistic sector suffered an in-
crease in time to delivery, a reduction of the number of connections
and several constraints applied by each country to reduce commerce
for inessential goods. Immediately after the end of the lockdown, the
time necessary for re-activating businesses was significantly longer
for companies with few logistic nodes for acquiring inputs and deliv-
ering goods (Deloitte 2020). The pandemic showed the limits of ex-
cessively globalised supply chains, which turned out not to be suffi-
ciently resilient (Hohenstein et al. 2015). It also pointed out the need
of a new strategy for procurement and sales that would reduce de-
pendence on international trade in order to avoid the risk of simi-
lar supply chain disruptions in the future (Choi, Rogers, Vakil 2020).
Figure 6 The expected impact of the COVID-19 on leisure hotels. Notes: Faster recovery: countries
that depend to a larger degree on domestic tourists and tourism represent a limited part of the economy;
Gradual recovery: countries that can still count on domestic tourism and less reliant on international tourism;
Prolonged recovery: countries largely depending on international travellers; Slow recovery: countries where
tourism play a small role in the economy. Source: Colliers International, 2020
Moreover, consumer behaviour has changed due to the experience of

e-commerce during the lockdown period and the opportunities relat-
ed to home delivery. For some countries, the growth of e-commerce
is expected to change radically the logistic and the industrial mar-
kets with an expected growth in the demand of “last mile” warehous-
es near the main cities (Prologis 2020).
3.4 Hospitality
The hospitality sector was the first to be directly affected by the

COVID-19 with hotels, both leisure and business, closing even be-
fore the enforcement of the lockdown measures. Therefore, it is cur-
rently one of the sectors that is suffering the most from the pandem-
ic and the social distancing rules (Fernandes 2020).
Many hotels registered cancellation not only during the lockdown
period but also for the following summer holidays. The negative ef-
fect is related to a lack of confidence of travellers regarding safety
Figure 7 Importance of domestic land (car) based travel. Source: Colliers International, 2020
and hygiene as well as the decrease of disposable income that may

oblige individuals to avoid unnecessary expenses. The impact on the
sector is expected to vary across countries also in relation to the in-
cidence of domestic versus foreign tourism [fig. 6].
An analysis of EU shows that the speed of the recovery for the
hospitality industry will vary across countries. The majority of coun-
tries (13) expect to recover quickly because the size of their tourism
sector is small and mainly driven by domestic demand. In contrast,
other countries will recover slowly since the demand is mainly driv-
en by foreigners (Belgium, Bulgaria, Hungary, Switzerland) or be-
cause the tourism sector is one of the most important sectors of the
economy (Spain). The worst scenario is for countries that were tar-
geting mainly foreign tourism (Croatia, Greece, Italy, Latvia, Portu-
gal). But among these countries there could be significant differenc-
es. For some of them the recovery could be faster due to a change in
the habits of their citizens that in the past preferred to go on holi-
day abroad (e.g. Italy) or due to the financial support offered by their
governments to the tourism industry (Colliers 2020).
Figure 8 The Impact of the COVID-19 on the companies’ business travel policy.
Source: GTBA data processed by the authors
Another relevant issue is the main type of transport used by tour-

ists (plane/boat or car), which varies significantly across countries
[fig. 7]. As international air travel is curtailed, markets more prone
to demand from international air travel are most exposed to a sharp
downturn. Markets that can function on domestic car-based travel
are probably the most resilient.
Looking at the hotel typology, business ones were also significant-
ly affected by the pandemic. This is because companies have changed
radically their travel policies due to government restrictions on citi-
zen mobility, issues related to the safety of their employees, and the
reduced profit margins available [fig. 8].
The effect on the hospitality sector is expected to last because al-
most all the companies were obliged to switch to online meetings
during the last months and it may represent an opportunity for busi-
nesses to reduce travel costs in the coming years. The impact is ex-
pected to be higher for the one-day journeys.
A forecast about the effects of the COVID-19 on the hospitality in-
dustry could be made by starting from comparable disruptive events
in the past [fig. 9].
A forecast of the hotel occupancy rate dynamics after the COVID-19
could be done by considering the SARS outbreak in Asia in the 2003.
The hotel statistics in the main urban areas in China show that af-
ter just two months from the discovery of the disease the hotel mar-
Figure 9a-b Effects of comparable disruptive events on the Hospitality Industry.

Source: Colliers International, 2020

ket collapsed in term of occupancy and fell below 10% of capacity.

When the country was able to control the pandemic, travel restric-
tions were removed allowing the hospitality industry to recover the
standard occupancy rates in only three months.
The main difference between the current pandemic and SARS is
that now the economy is expected to slow down significantly due to the
lockdown period, with a loss in average disposable income. The more
comparable event in the last decades in term of economic impact on the
hotel industry is the last financial crisis. More than seven years were
required to recover the average revenue per available room recorded
in 2007, and two more years to recover the gross operating profits per
available room. Moreover, the impact on the hospitality sector will be
different across countries depending on the length and severity of lo-
cal travel restrictions and quarantine rules (Voth 2020).
4 Conclusion
The economic slowdown related to the COVID-19 pandemic is not ex-

pected to last in the long term. The real estate market will likely be
one of the key drivers of economic growth in the recovery phase. How-
ever, the pandemic will change the standards requested for both resi-
dential and commercial assets. The expected change is not only relat-
ed to the rent or the price per square meter but also to a new demand
composition. This will oblige the landlords to adapt their supply to this
new market and offer assets in line with the requests of the tenants.
This process of adaptation will take several years and will not
be the same across countries and real estate sectors. The resulting
transformation of the real estate market will create new opportuni-
ties and accelerate ongoing trends.

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Part 6
Business Performance, Funding
and Growth
191
Private Equity & Venture Capital

Riding the COVID-19 Crisis
Keith Arundale
Colin Mason
Adam Smith Business School, University of Glasgow, UK
Abstract Private equity has successfully weathered economic crises in the past and
appears to be well-placed to manage the current coronavirus crisis. Whilst both fund-
raising and investments will be significantly reduced from pre-pandemic levels for some
time these are expected to recover and resume the historic overall growth trend. Private
equity firms may find opportunities through taking undervalued public companies pri-
vate and in restructuring under-performing businesses. However, start-ups may find
seed and early stage finance hard to access. Government support measures need to
meet the characteristics and needs of high growth enterprises.
Keywords Coronavirus. Fund raising. High growth enterprises. Investment. Pandem-

ic. Private equity. Start-ups. Venture capital.
Summary 1 Introduction. – 2 Trends in the Pandemic Period. – 2.1 Fund Raising. –

2.2 Investment Trends. – 3 Opportunities for Private Equity Firms. – 4 Impact on Start-ups.
– 5 Government Intervention. – 6 Prospects.
1 Introduction
Private equity is medium- to long-term finance that is invested by profession-

al fund managers in unquoted companies in return for equity stakes in those
companies (Arundale 2007; Gilligan, Wright 2014). It includes equity finance
for established businesses often provided to assist management teams to buy
out businesses from their existing owners (management buyouts – MBOs) or

ISBN [ebook] 978-88-6969-442-4
Open access 193
DOI 10.30687/978-88-6969-442-4/014
Keith Arundale, Colin Mason
Private Equity & Venture Capital. Riding the COVID-19 Crisis
growth capital for later stage expansion and early stage finance, oth-
erwise known as venture capital (VC), to help companies grow quick-
ly and scale successfully.
Private equity-backed enterprises make a significant contribu-
tion to the global economy in terms of greater innovation, increased
productivity, enhanced competitiveness and, in the longer term, in-
creased employment opportunities (Frontier Economics 2013). Ven-
ture capital has financed many so-called ‘unicorns’ (privately held
start-up companies valued at over $1 billion). For example, 82% of the
190 European start-ups that have achieved unicorn status are ven-
ture capital-backed (EuropeanStartups.co 2020). With its long-term
investment horizons, with funds typically having lives of 10 years or
more, private equity is usually less susceptible to the ups and downs
of economic cycles. The asset class successfully weathered the 2008
financial crash, despite debt finance used to leverage deals being in
short supply, and with far fewer failures than had been predicted by
some observers. Private equity maintained its relatively stable, long-
term overall returns of 13% to 14% pa. (BVCA 2010, 2019) which make
the asset class attractive to institutional investors and so provides es-
sential funding for high growth enterprises. The question is whether
this historic resilience will be apparent with the COVID-19 pandemic.
Many private equity and VC funds are constituted as limited part-
nerships (Gilligan, Wright 2014) whereby investors, such as pension
funds, banks, insurance companies, family offices, sovereign wealth
funds and endowment funds (the limited partners or LPs), commit
capital to funds which are managed by fund managers (the gener-
al partners or GPs). In 2019 alone over $600 billion of private equity
funds were raised globally, with accumulated funds of around $1.5
trillion now awaiting investment (Preqin 2020a).
In previous economic crises, fundraising for both private equity
and VC funds initially declined but then recovered, eventually hitting
new peaks as shown in table 1. Both fundraising for private equity
and VC funds declined following the dot-com and global financial cri-
ses periods but then quickly recovered. It is too early to tell wheth-
er fundraising has been impacted severely by COVID-19 in 2020 to
date. Certainly, both the number of funds and amount raised in Q1
2020 has fallen by 32% and 29%, respectively for private equity as
a whole, compared to Q4 2019 but this is not unusual with the rela-
tively slower fundraising that always occurs at this time of year. The
amount of capital raised by venture capital funds actually increased
in Q1 2020 by some 44% from the previous quarter, although this has
declined significantly in Q2 to date with a steep decline in the number
of funds closed (Preqin 2020b). As at April 2020 there were 3,620 pri-
vate equity funds in the market globally seeking to raise some $933
billion for their investment funds (Preqin 2020a).

Table 1 Funds raised during previous financial crises (data supplied to authors
by Preqin)
Private equity Venture

(buyout) capital
Year of final No of funds Aggregate No of funds Aggregate
close capital capital
raised ($bn) raised ($bn)
Dot com era
1999 225 92.9 293 42.2
2000 285 130.4 488 76.4
2001 256 91.0 359 43.5
Global financial crisis
2007 659 366.2 424 46.5
2008 655 357.5 445 52.7
2009 447 185.5 360 26.9
Pre-coronavirus pandemic
2018 833 537.9 1,105 108.5
2019 733 548.8 872 95.7
2020 Q1 211 102.6 225 37.7
2 Trends in the Pandemic Period
2.1 Fund Raising
Whilst LPs remain committed to private equity the amount of their

commitments is likely to fall as a result of recent stock market falls
which may lead to some rebalancing of asset allocations to private
equity and other asset classes (Real Deals 2020b). This is partly for
technical reasons – the ‘denominator effect’: if the value of their oth-
er types of investments go down then they will become over-allocat-
ed to private equity, prompting them to pull back on investing both
directly and indirectly, via funds, in private equity and venture cap-
ital (Mason 2020). Buyouts will compete with growth and venture
capital for investors’ preferred fund type. There has been a trend
in recent years of limited partner investors targeting fewer fund
managers with larger commitments in order to focus their GP rela-
tionships whilst maintaining their overall allocations to the private
equity asset class; this is likely to continue into and beyond the cur-
rent pandemic. Co-investment, where LPs invest in portfolio compa-
nies alongside their commitments through a GP managed fund, may
decline as LPs focus on their existing co-investments and shy away
from new single company investments. LPs may also be called upon
to commit additional capital to shore up existing companies in GPs’
portfolios. For GP firms seeking to raise capital additional to their

usual fund structures there has been a trend of GPs selling minori-
ty equity stakes in their firms as an alternative to seeking a public
listing; there are now fund of firms vehicles dedicated to building
portfolios of GP minority stakes. Teams trying to raise a fund for the
first time may find the fund raising process takes longer than usual,
possibly extending over two years, due to limitations on travel and
fewer opportunities to develop face-to-face relationships in what is
very much a people business. Where LPs were already well into due
diligence on prospective funds prior to the pandemic lockdown this
is likely to continue to completion. Whilst LPs may have put new in-
vestment activity on hold, a recent survey of LPs has noted that they
remain “cautiously optimistic” that activity will pick up once the cor-
onavirus pandemic abates (Houlihan Lokey 2020).
2.2 Investment Trends
On the investment side, in 2019 funds invested $393 billion in man-

agement buyouts (MBOs), down 20% from a record high in 2018, and
$224 billion in VC deals, down 17% from the prior year (Preqin 2020c).
Whilst a number of mega deals helped to prop up the value of buy-
outs in Q1 2020, the overall downward trend in 2019 is likely to con-
tinue further into 2020 with GPs focusing their efforts on safeguard-
ing existing portfolio companies, reserving more finance for follow-on
rounds and spending less time on sourcing new deals – at least initial-
ly in the pandemic. Buyout investments in Asia particularly declined
significantly by value in Q1 2020 although the number of deals held up;
possibly due to GPs not completing the larger deals due to the COV-
ID-19 crisis. VC deals fared worse in Q1 2020 both in terms of the de-
cline in number of deals completed and the overall value of deals with
Greater China, the initial location of coronavirus, suffering the most
with a 60% year on year decrease between Q1 2019 and Q1 2020 in
the aggregate levels of equity investment (Brown, Rocha 2020). En-
couragingly, deals in Asia have picked up again in Q2 2020 with a 21%
increase in aggregate deal value and a 6% increase in the number of
deals compared to Q1 2020, reflecting that VC is now emerging from
the earlier onset of the pandemic in Asia (Preqin 2020b).
Many GPs have been cancelling deals in the pandemic, or at least
delaying them, because of the uncertainty whether, in the absence of
a vaccine, there may be a second spike in cases which will result in
another global lockdown that will close businesses again (Real Deals
2020d). There is evidence that GPs have been dropping out of auc-
tions and investment committees are taking much longer to sign off
on even relatively small deals (Real Deals 2020a). It has also been re-
ported that some VCs have withdrawn from investments after sign-
ing term sheets and sending letters of intent (Beauhurst 2020a). GPs
are revising the scenario analyses of portfolio companies, building
in much longer holding periods to exit and downgrading valuations.
BVCA members reported that they expect to significantly mark down
portfolio valuations, by an average of some 20% (BVCA 2020a). Lat-
er-stage start-ups are expected to be hit the hardest as they reflect
the decline in public markets. Where deals are still being pursued
due diligence procedures on management and staff need to be com-
plemented with questions on furlough arrangements, termination
clauses, regulatory, data protection and employment law issues with
regard to requiring employees to take COVID-19 tests (Real Deals
2020e). Due diligence on rent and leasing agreements will need to
assess where rent has not been paid. Some VCs have been carrying
on with due diligence remotely via video conferencing such as Zoom
and DingTalk. It is unlikely that digital platforms will completely re-
place face-to-face relationship development between private equity
and VC investors and management teams but they are likely to con-
tinue to be used post-pandemic and may well help facilitate more
cost-effective interface with start-ups and other companies which
are located away from the investment hubs (Financial Times 2020c).
For their part, private equity and VC portfolio companies have
been cancelling, or at least postponing, their capital spend, concen-
trating on stocking levels, reviewing supply chains where these are
being challenged, renegotiating rent and leasing agreements, fur-
loughing staff and overall cutting costs where possible and, above
all, preserving cash. Firms with only a short runway of cash of, say,
less than 6 months are particularly vulnerable. Early communication
with banks and other lenders is required to arrange interest payment
holidays, relaxation of amortisation payments and suspension of loan
covenants. Other companies will need capital in order to exploit COV-
ID-19 opportunities, to pivot their business models and take advan-
tage of sectorial trends.
Governments have introduced new schemes to assist business-
es impacted by the pandemic. For example, in the UK these include
the Coronavirus Business Interruption Loan Scheme (CBILS) where-
by the government provides an 80% guarantee on each loan offered
by selected lenders through the state-owned British Business Bank.
However, CBILS does not support unprofitable companies and there
is also evidence that some banks in the UK and Europe have been
rejecting applications from PE-owned companies because of the fi-
nancial engineering from use of debt in buyouts that makes them
non-compliant with EU state-aid rules (Financial Times 2020a). Then
there is the Future Fund which provides convertible loans of between
£125 thousand and £5 million provided this is matched by private in-
vestment and the recipient companies have raised £250 thousand of
equity investment in past 5 years from third parties. Also private eq-
uity firms should themselves have the resources in terms of finance

and expertise to help support and turnaround viable companies.
3 Opportunities for Private Equity Firms
Private equity often benefits from a crisis and change. According-

ly there will be opportunities for PE firms to take public companies
private at lower valuations, buy up underperforming corporate sub-
sidiaries, engage in bolt-ons and carve-outs and profit from ‘special
situations’ (distressed assets, rescues and restructurings) as long as
there are no severely underfunded pension schemes involved. Some,
mainly US private equity groups, are taking a bullish view and are
aggressively striking deals during the crisis to take advantage of low-
er valuations (Financial Times 2020f). Some VCs have resumed in-
vesting, focusing on companies which are seeking new opportunities
in the crisis with in-demand services and sectors. Exits, essential for
PE funds to show returns to their LP investors and to generate car-
ried interest for the GPs, are likely to be delayed with longer hold-
ing periods. Investec’s annual GP trends survey reveals that some
83% of GPs do not expect to make an exit in the next 12 months (Bain
& Co 2020). Whilst M&A activity may be somewhat reduced for pri-
vate equity firms, opportunities for exits may come from some of the
large technology companies, such as Alphabet, Amazon, Apple, Fa-
cebook and Microsoft, which have been energetically pursuing deals
following recent stock market falls (Financial Times 2020b). Howev-
er, this is raising concern that “a few powerful firms are set to gain
more clout”, prompting governments in various countries to consid-
er tightening their rules on foreign takeovers (Mason 2020); indeed
a number of European countries have already announced stricter
screening measures on foreign investment following new guidance
issued by the European Commission (Real Deals 2020c). On a posi-
tive note, there has been a recent resurgence of interest in IPOs (Fi-
nancial Times 2020e).
Private equity firms are increasingly focused on specific industry
sectors. To the extent that changes can be made to the sector strat-
egies set out in private placement memoranda and limited partner-
ship agreements and the expertise of the individual investment ex-
ecutives, firms may need to rebalance their portfolios away from the
hardest hit sectors such as hospitality and travel. Those firms focused
on the tech sectors, including digital healthcare, fintech, cybersecu-
rity, artificial intelligence, edtech, gaming and more traditional phar-
ma, medical devices and e-commerce should be better able to weath-
er, and even benefit from, the current crisis. For example, investors
are actively targeting health-tech start-ups from those involved with
remote-healthcare apps to those developing new drugs targeting cor-
onavirus (Financial Times 2020d); VC-backed health-tech deal values

are rising in the COVID-19 environment (Preqin 2020b).
4 Impact on Start-ups
Whilst the pandemic is clearly impacting on private equity firms and

their portfolio companies, many of which will have been subject to
a management buyout or a take private transaction in the past, it is
perhaps the effect on start-ups and VC financing that the pandem-
ic is having the greatest effect. There is a clear consensus that this
economic crisis will result in a decline in VC (Mason 2020). As evi-
dence of this the Plexal Start-Up Tracker1 monitors start-ups and fast-
growth businesses in the UK that have attracted equity or venture
debt funding and publishes statistics each week on investments by
value and number of deals. For the period from March 23 to June 17
2020, when the country was in the lockdown, the tracker revealed
that there was a 48% decrease in the value of start-up investment
and a 34% decrease in deal numbers compared to the same period
in 2019. As noted above, VCs are backing existing portfolio compa-
nies and focusing their new deals on the more established later stage
companies. It is likely that there will be a decline in VC investing over
the remainder of 2020 and possibly beyond for three reasons: (1) port-
folio companies in sectors impacted most severely by the crisis are
finding it difficult to increase revenues and scale, (2) VCs are finding
it much harder to raise new funds and (3) opportunities to exit from
investments are relatively scarce (Mason 2020). The situation is par-
ticularly concerning for start-ups seeking their first round of VC fi-
nance when they have little or no cash buffer to cope with their lack
of revenues. Funding for UK start-ups raising for the first time fell by
83% between March 23 and May 17 compared to the same period in
2019 (Sifted 2020c). These companies will likely fail, go into hiberna-
tion or continue to bootstrap. A survey of 250 growth businesses in
the UK seeking investment reported that 9 out of 10 will close with-
in the next 12 months if their current investment plans, disrupted by
the coronavirus crisis, fail to materialise (Save Our StartUps 2020).
There is evidence that some business angel investors, who usual-
ly precede VCs in the “funding escalator” (Mason, Botelho, Harrison
2016) and who are the dominant source of early stage equity capi-
tal, are continuing to invest in start-ups during this pandemic. A sur-
vey of angel investors and early stage VCs in May 2020 by Activate
our Angels2 revealed that 67% of the 223 respondents were still in-
1 https://www.plexal.com/startup-tracker.
2 https://www.activateourangels.com.

vesting during the lockdown (51% investing in new deals and 16% in
their existing portfolios); they are getting deals done at reduced val-
uations. However this optimistic view is qualified by other surveys
and commentary which suggest that business angels might be seek-
ing to conserve cash to support their existing investments (Mason
2020). The on-going support by angels appears to vary by country
and type of angel investor, with occasional (or ‘tourist’) angels hav-
ing largely disappeared (Sifted 2020d). With many VCs now focusing
on their existing portfolios to the detriment of new investments, an-
gels will need to fund their scale up businesses for longer. The neg-
ative impact of the current crisis on angel investing could be similar
to that experienced in the post dot-com era and the global financial
crisis (Sohl, Lien, Chen 2020).
Equity crowdfunding platforms, such as Crowdcube and Seedrs,
have experienced a drop in investment activity of around 20% since
lockdown (Sifted 2020a). Crowdfunding is an important component
of the funding escalator, often preceding or complementing angel in-
vestment and acting as an additional “proof of concept” and market-
ability for VC investors.
Table 2 Summary of issues and opportunities for private equity and venture capital
Investors (LPs) PE firms VC

Reduced allocations to PE asset Deals postponed or cancelled Favoured sectors
class
Longer fund raising process Extended due diligence for deals Reduced valuations
in progress
Extensions to fund terms Longer holding periods Non-existent exits
Difficulties in raising first-time Stricter rules on foreign acquirers Reduced finance for start-ups
funds
Additional commitments Opportunities with take privates New government support
to support portfolio companies and distressed assets schemes – but not for start-ups
Wall of funds raised not invested Continued support from business
from prior years angels
5 Government Intervention
Governments have introduced a wide variety of support measures for

the small business sector in the coronavirus pandemic to help them
preserve cash, providing loan finance, both directly and by providing
guarantees to banks, subsidising employee costs, and allowing the
deferral of tax, business rates and social security payments. However,
these schemes will have limited benefits for high-growth enterprises.
For example, the UK’s CBILS scheme referred to above, which pro-
vides financial support in the form of guaranteed bank loans to small-
er businesses across the UK that are losing revenue and seeing their
cashflow disrupted as a result of the COVID-19 outbreak, requires
businesses to meet the lending criteria of banks in order to qualify.
However, many would not meet this requirement as they might not
have sufficient trading record or, typical of VC backed companies,
may currently be loss making and hence unable to service a bank
loan. A new loan guarantee scheme for companies not able to access
CBILS has been advocated. Support to enable firms to furlough staff
provides few benefits to new and small firms as staff are not permit-
ted to work if they are furloughed and companies must continue to
trade in order to survive. The Future Fund which provides converti-
ble loans of between £125 thousand and £5 million that is matched by
private investment is only available to businesses that have received
£250,000 of external investment in the previous 5 years. Moreover,
the investment by private investors is not eligible for relief under the
EIS, SEIS and VCT schemes (BVCA 2020b) and so is unattractive to
business angels (SeedLegals 2020). In addition, if companies choose
to repay the loan and not convert to equity they are required to pay
back double what they borrowed, plus interest (Beauhurst 2020b);
this onerous constraint should be reviewed (Sifted 2020b).
6 Prospects
The decline in both private equity and venture capital investment in

terms of the amount invested and the number of deals that we are
seeing in this current coronavirus crisis will impact on the speed
and strength of the economic recovery. Many deals will be follow-on
rounds as investors seek to strengthen the financial runway of their
portfolio companies. As noted above there are opportunities for pri-
vate equity firms to take undervalued public companies private and
to restructure underperforming businesses. The lack of venture cap-
ital will mean that recent start-ups will close resulting in the loss of
businesses that might otherwise have flourished and preventing com-
panies that have traction to develop and scale. It is likely that seed
investing will suffer the most, making it difficult for start-up busi-
nesses to get off the ground. This has serious implications as when
current furloughing arrangements cease a larger number of redun-
dancies are likely to occur; finance for redundant employees look-
ing to start their own businesses will be in short supply. This needs
urgent government review along with a revitalisation of local gov-
ernment supported training programmes to reskill workers and to
provide business planning and finance raising advice. Whilst the ma-
jority of such businesses will be SMEs with fewer than 10 employees
and little potential or ambition for growth, some may develop into the
high-growth enterprises that are the bedrock of private equity and
entrepreneurial finance investment and which drive innovation, em-

ployment creation and productivity growth. Amendments or additions
to current government financial support schemes are required which
are aimed particularly at start-up businesses and which better suit
the characteristics and needs of high growth potential enterprises.
Fund managers will need to be openly transparent with their in-
stitutional investors with frequent communication on capital calls,
delays in distributions and plans to mitigate the impact of COVID-19.
They will also need to continue spending more time in supporting
their portfolio companies in helping them to adjust to the new envi-
ronment, seek new opportunities arising from the pandemic, pivot
business models and manage cash.
To conclude on a positive note, private equity has successfully
weathered economic shocks before and the signs are that it is well
prepared to do so again despite the immediate cutback in activity.
Many successful companies are founded in recessions – WhatsApp,
Instagram, Uber, Pinterest, Slack and Square were all founded in
the aftermath of the 2008 global financial crisis. This is reflected in
fund returns with some of the best performing vintages established
in periods of economic crisis.
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ness and Economics.

Mergers and Acquisitions

in the Years of COVID
Slowing Down Before
Accelerating Yet Again
Nikolaos Antypas
Abstract Mergers and acquisitions (M&As) have been less frequent during crises. The
COVID-19 pandemic has resulted in a global economic shock and a surge in uncertainty,
depressing M&A activity to record low levels. The unpromising economic prospects, the
persisting high valuations, and potential liquidity crunches will restrict acquisitions for
the foreseeable future. Companies with large cash balances may perform opportunistic
acquisitions when asset prices drop to attractive levels. Acquisition activity can be fur-
ther affected by government actions, especially if governments discourage acquisitions
to promote market competition.
Keywords Mergers. Acquisitions. Growth. Corporate investments. Investment banking.
Summary 1 Introduction. – 2 M&A Activity. – 3 Valuation Multiples and Premia. –

4 Liquidity, Cash Reserves and Dry Powder. – 5 Concluding remarks, the Future of M&As
and the Role of Regulators.
1 Introduction
Mergers and Acquisitions (M&As) have been an integral part of the corpo-
rate success story for the last few decades. Acquiring firms have been ab-
sorbing other companies with the aim of improving their offering, enhance
their market share, or enter new markets. At the same time, companies have
been divesting assets and company segments in an effort to shift their activ-
ity focus (Mavis et al. 2016). Selling or target firms have been divesting full

ISBN [ebook] 978-88-6969-442-4
Open access 205
DOI 10.30687/978-88-6969-442-4/015
Nikolaos Antypas
Mergers and Acquisitions in the Years of COVID. Slowing Down Before Accelerating Yet Again
or partial ownership of their assets, usually in exchange for hefty re-

turns, i.e. ‘premia’,1 or for a chance to save their business from a wide
array of challenges, such as financial constraints, obsolescence, and
productivity inefficiencies (see e.g. Hopkins 1991). A sizeable indus-
try serving both sides of the transaction has mushroomed over the
years, providing auxiliary services such as due diligence, financing,
even match-making between buyers and sellers.2 While M&A activ-
ity almost never stops, it follows a wave-like pattern over the years,
with peaks and troughs in the number and total value of deals. The
troughs usually coincide with economic shocks related to surges in
market uncertainty, economic slowdown, and liquidity crunches.
The current COVID-19 pandemic posits an unprecedented shock
to the modern, global economy. While an accurate prediction on the
economic damage is impossible at the time of writing (June 2020), the
OECD expects the impact to be the worst during peace-time for at least
the last 100 years (Giles 2020). As a result, M&A activity has also tak-
en a hit. In this chapter, we will look at several aspects of M&As and
the ways the current pandemic has affected them. When appropriate,
we will extrapolate from past experience and try to predict the impli-
cations for prospective acquirers and the overall M&A industry for
the foreseeable future.
2 M&A Activity
The number of deals and aggregate deal value per annum fluctuate
over time. In 2019, the global M&A market saw 49,849 deals totalling
a value of $3.70 trillion, which is markedly higher than 2009, when
the market saw 40,710 deals totalling $2.19 trillion (IMAA 2020).
In 2007-08, all major economies were affected by the Global Finan-
cial Crisis and, as a result, the number of transactions plummet-
ed. The US market, which usually yields most of the global deal ac-
tivity, experienced a severe drop in deal making as well. Figure 1
shows the annual M&A activity in deal numbers and total value for
the US [fig. 1]. Both activity metrics follow the pattern of waves that
span over several years; activity usually plummets at the onset of an
economic shock, which introduces uncertainty for corporate perfor-
mance and, therefore, unfavourable economic prospects for acqui-
sitions. Three distinct waves can be identified in figure 1: the “Dot-
Com” wave in the late 1990, a consolidation wave in the mid-2000s,
1 For a review of acquisition premia, see Laamanen 2007; Alexandridis et al. 2013;
Nielsen, Melicher 1973.
2 For a review of investment banks and deal auxiliary services, see Chemmanur, Ert-
ugrul, Krishnan 2019; Golubov, Petmezas, Travlos 2012; McLaughlin 1992.

Nikolaos Antypas
and a mega-deal wave in the 2010s, where the total deal value sur-
passed the previous wave, but deal number did not recover (see e.g.
Alexandridis, Antypas, Travlos 2017).
Figure 1 Deal activity by year. The deals include transactions by US-based acquirer and deal value of at least
$1 million. The following types of transactions have been excluded: Minority Stake Purchases, Privatizations,
Leveraged Buyouts, Repurchases, Recapitalizations, Self-Tenders, Exchange Offers, Acquisitions of Remaining
Interest. Source of data: Securities Data Company (SDC) by Refinitiv
The economic uncertainty introduced by COVID-19 has resulted in

the near total suspension of deal-making in 2020. The decrease in ac-
tivity, as presented in figure 1, shows an unprecedentedly low level of
deals, although the 2020 data reflect only the activity during January-
June. In order to have a fair understanding of the COVID-19 impact on
deals during early 2020, I have created a month-by-month comparative
analysis. In figures 2-3, we see the number and total value of deals,
respectively, during the first few months of 2020 and the average of
the same months over the years 1985-2019 [figs. 2-3]. The M&A activity
started deteriorating in February, when COVID-19 was developing in-
to a pandemic and capturing an increasing portion of the news head-
lines. Since then, most US-listed companies have announced a major
hit to their first-quarter earnings due to the sudden drop in econom-
ic activity across most sectors, especially in transportation, consum-
er products, and hospitality services (see e.g. Morris 2020). The broad
economic effect of the pandemic has cast doubts, not only on the short-
term prospects for the economy, but also on the duration of the reces-
sion. As the crisis persists, transaction metrics are expected to re-
main depressed.
Corporate executives have acknowledged the unpredictable dura-
tion and impact of the pandemic, which has forced them to revise their
acquisition plans. According to a small-scale survey, more than 50% of
prospective acquirers have either withdrawn from deal negotiations
or postponed their acquisition plans, while about 23% expect to con-
Nikolaos Antypas
Figure 2 Number of Deals per Month. The deals include transactions by US-based acquirer and deal value
of at least $1 million. The following types of transactions have been excluded: Minority Stake Purchases,
Privatizations, Leveraged Buyouts, Repurchases, Recapitalisations, Self-Tenders, Exchange Offers,
Acquisitions of Remaining Interest. Source of data: SDC by Refinitiv
Figure 3 Total Deal Value per Month. The deals include transactions by US-based acquirer and deal value
of at least $1 million. The following types of transactions have been excluded: Minority Stake Purchases,
Privatizations, Leveraged Buyouts, Repurchases, Recapitalisations, Self-Tenders, Exchange Offers,
Acquisitions of Remaining Interest. Source of data: SDC by Refinitiv
tinue their investments in the second half of 2020 (Herndon, Bend-

er 2020). Their plans should be contingent to two main factors. First,
a potential second wave of infections may lead state governments to
enforce a second lockdown, unless an effective and readily available
treatment has been introduced by then. Second, consumption may not
recover to pre-pandemic levels, since the increase in unemployment
and bankruptcies may have resulted in a permanent loss of income
for a critical proportion of the population. Therefore, prospective ac-
quirers may have to postpone their plans once again and wait for mar-
ket prospects to improve before continuing with their investments.
Nikolaos Antypas
It is important to note that regardless of the changes in the ag-

gregate level of M&A activity, companies may still conduct acquisi-
tions while the pandemic persists. Their decision will have to fac-
tor in the economic and strategic prospects of the deal, the absolute
and relative cost of the acquisition, capital availability, and poten-
tial regulatory concerns. We will be looking into these factors in the
following sections.
3 Valuation Multiples and Premia
One of the most important features of a deal is the price. Acquirer

and target shareholders have to come to an agreement on a fair price
for the target firm’s shares, as well as the appropriate consideration
structure, i.e. cash, stock, or a mix of the two. It is common for acquir-
ers to pay a ‘premium’ for a target’s shares. In general, the premium
is an amount paid on top of the target’s fair equity value. In the case
of publicly listed targets, the premium is defined as the percentage
by which the target market capitalisation implied by the offer price
exceeds the target’s recent market capitalisation. Historically, the
average premium has been around 20-30%.3 The premium serves as
an enticement to target shareholders, who would otherwise have lit-
tle incentive to sell their shares at current market prices. The premi-
um can also be viewed as the target firm’s share of the future syner-
gistic gains that are expected to be achieved by the new, combined
entity. If the premium is low, the acquirer’s shareholders may enjoy
a larger share of the future synergies; while if it is too high the ac-
quirer’s shareholders may receive only a small part of the synergies,
or they may lose part of their current value. Therefore, it is apparent
that the pricing exercise is a key step in designing an acquisition, and
is the single most important aspect that can ‘make or break’ a deal.
The complexity of pricing has been further complicated during
the pandemic. In previous economic and financial crises the market
has reflected the decrease in economic prospects in security pric-
es. The lower expected revenue and higher probability of insolven-
cy have led to a decrease in stock prices, even for individual stocks
with relatively good prospects. However, in 2020 the stock market
in most western countries has substantially recovered after a quick
and sharp correction, while the economic prospects of the respective
countries have deteriorated. Although it may be too early to identify
the causes of the market-economy disconnection, the prevalent ex-
planation is complex and involves the following factors:
3 The premium figure is calculated based on SDC data for deals with US acquirers
that are valued at more than $1 million.

Nikolaos Antypas
1. the reported willingness of central banks to provide unlimit-

ed support to the economy (Lewis 2020),
2. optimism for the discovery of an effective vaccination within
the next 12 months (Gallagher 2020),
3. the gradual re-starting of economic activity in countries with
imposed lockdowns (BBC 2020).
Regardless of the causes for the market-economy disconnection,

stock prices do not reflect the cash flow potential of the underlying
businesses. As can be seen in [fig. 4], US stock prices have remained
near an all-time high, after a sharp, short-lived correction. In order
to understand the stock market optimism and the disconnection be-
tween the market and the economy, we will look into the price-to-
earnings (P/E) ratio for the S&P 500 index. For shares, the P/E ratio
shows the amount investors are willing to pay today in order to have
a claim on one unit of earnings. The aggregate index P/E ratio can be
interpreted as being based on investor expectations for future earn-
ings growth; a high P/E ratio can indicate either high growth expec-
tations or overvaluation, while a low P/E ratio indicates uncertainty
about future growth or undervaluation.
Figure 5 shows the S&P 500 P/E ratio since 1985. The recent P/E
ratio is no lower than for the past 20 years [fig. 5]. Despite the 13.3%4
US unemployment rate and the 45 million new unemployment claims
in the US between February and June,5 the market seems to have
maintained unreasonably high expectations regarding future earn-
ings growth. We can refine this conclusion after adjusting the P/E ra-
tio for inflation and long-run earnings. The refined measure, labelled
“Shiller P/E ratio” after Robert Shiller, provides a smoothed meas-
ure of valuation.6 Figure 6 shows the S&P 500 Shiller P/E ratio since
1985 [fig. 6]. The interpretation of this new measure suggests that val-
uations have been near the highest levels since the outbreak of the
“DotCom bubble” in the late 1990s. Most surprisingly, if we ignore the
period of irrational valuations of the late 1990s and go further back
in time, the current S&P 500 Shiller P/E ratio is near its highest lev-
el since the retro-fitted estimation of the index for back to 1872. This
is indicative of the market-economy disconnection, and the optimism
portrayed in the markets despite the dreadful recession ahead of us.
Prospective acquirers attempting to take control of a public tar-
get should be willing to pay a premium on top of the aforementioned
historically high prices, while the prospects of revenue and earn-
4 For more details, see http://www.bls.gov.

5 For more details, see https://www.dol.gov.
6 For more details on the calculation and interpretation of Shiller’s P/E ratio, see htt-
ps://www.multpl.com/shiller-pe.

Nikolaos Antypas
Figure 4 S&P 500 Index. Source of data: EIKON by Refinitiv
Figure 5 S&P 500 P/E ratio. Source of data: https://www.multpl.com/
Figure 6 S&P 500 Shiller P/E ratio. Source of data: https://www.multpl.com/

Nikolaos Antypas
ings growth are uncertain for the foreseeable future. Cautious ac-
quirers usually avoid the risk of overpaying for assets, and the high
stock market valuations may hamper M&A activity during the pan-
demic. An exception to this expectation can be the consolidation of
ailing sectors, such as transportation and hospitality, where com-
panies may need to join forces in order to survive. In these cases,
we may see more mergers of equals instead of acquisitions.
Nevertheless, some deal activity may also continue in the least af-
fected sectors, especially deals with stock swap consideration, since
there is evidence suggesting that the absolute level of valuation may
be less important than the relative valuation between the acquir-
er and the target (see e.g. Rhodes‐Kropf, Viswanathan 2004). Spe-
cifically, acquirers that are overvalued relative to their targets will
still pursue the acquisition in order to take advantage of the benefi-
cial overvaluation. The window of opportunity for such acquisitions
is unknown, since the disconnection between the securities market
and the economy may be reduced at any time. In any case, due to the
high uncertainty in the securities market, we may see the applica-
tion of strict price collars, that define the exchange rate of acquir-
er and target shares within and outside pre-agreed price ranges.7
4 Liquidity, Cash Reserves and Dry Powder
The poor short- and mid-term prospects for the economy may be less of
a deterrent for aspiring acquirers with sufficient liquidity. Robust cash
reserves fulfil a double role during the pandemic. First, they support
the operations of the companies during the recession. Since the dura-
tion of the downturn cannot be forecast with reasonable accuracy, the
large reserves place these cash-rich firms at the advantage of main-
taining operational capacity and being ready to capture the recover-
ing demand. Second, the excess cash reserves can be used as con-
sideration for M&As in case raising capital in the securities markets
is too slow for a time-sensitive investment opportunity, or the mar-
ket uncertainty results in low demand for equity and debt issuance.
Large companies have been amassing cash for the better part of
the last decade, waiting for the opportunity to buy undervalued as-
sets of strategic importance to their business (Rocco 2019). In table
1, we can see the cash balance in absolute terms, and as a percent-
age of total assets for the largest 10 US companies in 2008 and 2019.
The reason we compare these two years is because they preceded
years of major economic shocks. We also see the net cash position
for each firm, which is calculated by subtracting debt from cash. One
7 For a review of price collars, see Officer 2004.

Nikolaos Antypas
takeaway from table 1 is that many of the top 10 cash-holding firms,

as a group, have stronger positions in 2019 ($754 billion) compared
to 2008 ($323 billion) even after accounting for inflation. This can
be partially attributed to the companies that were in the list in 2008
having even larger cash balances in 2019. Another key insight, tak-
en from untabulated information, is that the top cash-holders of 2008
proceeded to perform a series of strategic acquisitions in the after-
math of the crisis. We expect that this will be the case for the post-
COVID-19 era as well, especially since cash balances have grown
more than ever before.
Table 1 Top 10 cash-holding companies in 2008 and 2019. Financial and utility
companies have been excluded from the list due to dissimilarities in accounting
standards and regulatory treatment. Source of data: Compustat by Capital IQ
2008 Company name Cash Cash over Net Cash

(in 2019 $bn) Total Assets (in 2019 $bn)
1 GENERAL ELECTRIC CO 59.59 6% -332.41
2 EXXON MOBIL CORP 38.01 14% 29.67
3 FORD MOTOR CO 37.23 14% -70.3
4 BERKSHIRE HATHAWAY 35.19 11% -3.95
5 CISCO SYSTEMS INC 31.16 45% 23.57
6 APPLE INC 29.09 62% 29.09
7 PFIZER INC 28.18 21% 18.73
8 MICROSOFT CORP 28.1 33% 28.1
9 ALPHABET INC 18.82 50% 18.82
10 WYETH 17.27 33% 4.42
Sum 322.64 -254.26
Average 32.26 29% -25.43
2019 Company name Cash Cash over Net Cash

(in 2019 $bn) Total Assets (in 2019 $bn)
1 BERKSHIRE HATHAWAY 135.22 17% 36.39
2 MICROSOFT CORP 133.82 47% 54.71
3 ALPHABET INC 119.68 43% 104.91
4 APPLE INC 100.58 30% 8.77
5 AMAZON.COM INC 55.3 25% -7.91
6 FACEBOOK INC 54.86 41% 44.92
7 ORACLE CORP 43.06 37% -27.67
8 ABBVIE INC 39.92 45% -23.3
9 GENERAL ELECTRIC CO 36.92 14% -33.48
10 FORD MOTOR CO 34.65 13% -67.76
Sum 754.01 89.58
Average 75.40 31% 8.96

Nikolaos Antypas
A considerable portion of the M&A activity during the next few

months may originate from professional investors such as Private
Equity (PE) and Hedge Funds (HF). The capital available for invest-
ments, i.e. ‘dry powder’, was at a record of $2.5 trillion in 2019 (Es-
pinoza, Platt 2019). PE companies rely on their ability to pinpoint
the firms with strong cash-flow statements, as well as growth and
cost-cutting potential. A market fall may trigger a buying spree from
professional investors. It is important to note that both PE and HF
companies have a unique advantage compared to other investment
management firms: their investment horizon is significantly longer
than the average investor, and spans more than the few years the
pandemic is expected to directly affect the markets. The average in-
vestment horizon for PE companies is about seven years, while some
HFs invest with horizons of decades. As a result, we may see pro-
fessional investors wait patiently for short-term liquidity crunches
to occur, rendering them irresistible partners to distressed firms.
The overall outlook in terms of capital availability can be favoura-
ble for some acquirers, regardless of the downturn in aggregate eco-
nomic output. An additional contributing factor is the persisting and
historically low interest rates. The Federal Reserve, the Bank of Eng-
land, and the European Central Bank have declared that they will allow
benchmark interest rates to remain at low, even negative levels, for the
foreseeable future in order to support their respective economies (Fi-
nancial Times 2020). As a result, corporations with healthy cash flows
and sustainable leverage levels could take advantage of the favourable
debt market, and fund their M&A plans with inexpensive debt capital.
5 Concluding remarks, the Future of M&As

and the Role of Regulators
Since the beginning of the 20th century, the US economy has experi-
enced at least seven M&A waves, i.e. wave-like patterns of M&A ac-
tivity levels. There are various theoretical explanations for the forma-
tion of waves (see e.g. Maksimovic, Phillips, Yang 2013; Goel, Thakor
2010), and the most widely accepted framework is the neoclassical
theory (see e.g. Ahern, Harford 2014), which is based on the field of
neoclassical economics. The neoclassical theory of acquisitions is that
the market for corporate control reacts to an industry-wide shock,
such as the introduction of ground-breaking technology, or a sudden
decrease in supply of raw materials. When industry-specific shocks
coincide and, most importantly, capital availability is high, a market-
wide M&A wave is formed (Harford 2005). If all these conditions are
fulfilled, we could be soon see the onset of a new merger wave.
Regulators should be aware that the form of economic stimulus
they provide, and the criteria they attach to the help they offer, may
Nikolaos Antypas
contribute to a rise in deal activity and the creation of an M&A wave.

For instance, if companies are offered debt in order to survive the
economic slowdown in the short-run, they may face accelerated insol-
vency issues when they need to pay back the loans, unless econom-
ic activity recovers materially or state support is prolonged until re-
covery. This predicament will increase the acquisitions of distressed
firms by more liquid acquirers. Instead, if companies are incentiv-
ised to cut costs and downsize, which would be a politically charged
policy, more companies would divest their assets and focus on their
core business segments. The policies to be announced and imple-
mented may yet be the most significant factor determining M&A ac-
tivity during and after the crisis.
The contribution of the state is significant, even if a merger wave
does not materialise in the near future. As has been mentioned ear-
lier, the cash balances of some companies have stayed strong for a
few years, and these companies have increased their relative ‘buy-
ing’ power relative to companies that are struggling during the reces-
sion. As a result, we may observe sector-specific market consolidation
led by industry leaders with large cash reserves, spare debt capaci-
ty, or high stock valuations, e.g., price-to-earnings ratios. There have
been discussions among regulators about preventing a consolidation
wave during the pandemic, especially banning acquisitions by firms
that have received state funding, so that markets remain competitive
(Fontanella-Khan, Fedor 2020). The government institutions respon-
sible for maintaining market competition, such as the Federal Trade
Commission (FTC) in the US and the Competition and Markets Au-
thority (CMA) in the UK, may face intense pressure to forbid deals
that could save target companies from insolvency, so that markets
remain competitive.
At every turn of the economy, the market for corporate control has
followed suit in an attempt to decrease efficiencies and empower cor-
porations to thrive. The current pandemic is poised to become one of
the sharpest turns in modern economic history and, thus, the M&A
activity during and after this crisis should reflect the proportions of
such a novel shock. Companies with good access to capital are ex-
pected to benefit most from this turmoil, while companies that have
already been struggling will become inexpensive targets when se-
curity markets adjust to match their share price with their poor eco-
nomic prospects. Finally, regulators will have to balance their efforts
between saving existing corporate structures via allowing consoli-
dation, and maintaining market competition at healthy levels. What-
ever lies ahead, we will most certainly look back to these times for
instruction in extremity, same as we do with the Global Financial Cri-
sis and previous major crises.

Nikolaos Antypas
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On the Impact of COVID-19-Related

Uncertainty
Marta Castellini
Università degli Studi di Brescia, Italia; Fondazione Eni Enrico Mattei, Milano, Italia
Michael Donadelli
Università degli Studi di Brescia, Italia
Ivan Gufler
Abstract COVID-19 has generated a substantial increase in the level of economic

policy uncertainty (EPU) around the World. Recent empirical investigations suggest
that the COVID-19 has played a key role in amplifying the overall level of political un-
certainty. In Italy, where anti-COVID-19 measures were implemented with some delay
and were badly communicated, EPU rose dramatically. We examine the implications of
rising COVID-19-related uncertainty for company revenues, gross operating margin and
employment in 16 different Italian sectors. Our findings indicate construction, educa-
tion, manufacturing activities and hospitality as the most hit sectors, with an average
short-term drop in company revenues of around 4% in annual terms and a recovery
time of almost two years. Thus, COVID-19-related uncertainty is found to be a significant
business cycle driver.
Keywords Political uncertainty. COVID-19. Non-macro-related uncertainty. Ambigu-

ity. Revenues. Employment.
Summary 1 Introduction. – 2 Empirical Analysis. – 3 Concluding remarks.

ISBN [ebook] 978-88-6969-442-4
Open access 219
DOI 10.30687/978-88-6969-442-4/016
Marta Castellini, Michael Donadelli, Ivan Gufler
1 Introduction
Undeniably, the set of social-distancing measures adopted in the ma-

jority of advanced economies hit by the COVID-19 pandemic since the
beginning of February 2020 led to a severe drop in the global aggre-
gate demand. According to current knowledge, it is also very likely
that the COVID-19 virus will continue to spread around the world in
coming months and that the high degree of uncertainty surrounding
its diffusion will certainly generate further drops in market demand,
especially in some economic sectors. Not surprisingly, estimates of
the International Monetary Fund (IMF) indicate a cross-country aver-
age drop in real GDP among the G7 countries of almost 9.5% for 2020.
Table 1 IMF Real GDP growth estimates for 2020 (Source: IMF)
Canada France Germany Italy Japan UK US

-8.40% -12.50% -7.80% -12.80% -5.80% -10.20% -8.00%
Notes: this table depicts the IMF Real GDP growth estimates for 2020 in the G7.
Source: IMF World Economic Outlook (June 2020)
With a total number of cases (deaths) of almost 240,000 (35,000), It-

aly has been one of the advanced economies most severely hit by the
COVID-19 virus. This has forced the government to implement more
stringent social distancing measures than in other countries. Differ-
ently from other contexts, Italy took some time to implement such
measures. Indeed, the first measure was adopted 23 days after the
first 100 confirmed cases of COVID-19 were reported, amplifying thus
the risk of infection. France, Germany and the US reacted instead af-
ter 12, 8 and 15 days, respectively. Needless to say that, in facing a
pandemic emergency, timely policies are fundamental to support the
economy in case of an imminent slowdown. This initial delay in im-
plementing the social-distancing rules and the subsequently stricter
COVID-19-related measures (such as lockdown and forced stop of in-
dustrial production), together with a fragile fiscal and political struc-
ture, are responsible for the estimated 12.80% drop in the Italian re-
al GDP [tab. 1]. More probably, this figure is also the result of the high
level of uncertainty induced by both the delay and the lack of clari-
ty in the measures adopted and implemented by the Italian govern-
ment. In particular, the vagueness of policy communication had siz-
able adverse effects on business and consumer confidence, leading
to a further drop in private consumption and investment.

Of course, some sectors have been more affected than others.1

More importantly and, most likely for some sectors, the COVID-
19-induced crisis will last longer than the virus itself. Not surpris-
ingly – due to current and future, national and international, trav-
el restrictions for people – the most suffering sector is (and will be)
“hospitality and tourism”. For instance, Prometeia (2020) has esti-
mated a post-COVID-19 scenario characterized by a drop in added
value in “accommodation and food service activities” of around 30%,
which is more than twice compared to other sectors such as “man-
ufacturing” and “construction”. It is clear that in Italy, where the
overall impact of tourism on GDP is around 13%, the return to pre-
COVID-19 aggregate macroeconomic conditions is going to be quite
slow. The “transportation and storage” and “art, leisure and enter-
tainment” sectors are also expected to suffer more than others (Pro-
meteia, 2020).
Some direct economic measures to stimulate these sectors have
been adopted and will be soon implemented by the Italian govern-
ment. However, whether or not these economic incentives will be
enough to mitigate the devastating economic impact of COVID-19 still
remains an open issue. In the current scenario, the effectiveness of
such incentives depends on many factors. One of them is the politi-
cal uncertainty that has recently rocketed in both Italy and Europe
[fig. 1]. Indeed, in March 2020 the level of EPU rose by 110% in Eu-
rope (70% in Italy). As already shown in Bernanke (1985) and Baker
et al. (2016), among others, political-related uncertainty could make
consumers and entrepreneurs more cautious, discouraging both cur-
rent and future consumption, as well as investments. In addition, the
adverse effects of political uncertainty on production and labour mar-
ket conditions have been shown to be more severe during bad times
and when the economy is at the Zero Lower Bound (Caggiano et al.,
2017a, b). Due to its recessionary effects, the rising of EPU would call
for a cut in the central bank policy rate (CBPR). However, when rates
are close to zero, there is no room for conventional monetary policies
and the loss of their effectiveness makes EPU shocks more harmful.
Of course, unconventional monetary policies might help, but (some-
times) at the cost of rising perceived policy uncertainty.
1 Further discussion could be also devoted to the relation between a company’s tech-
nological automation level and the impact of containment policies on the firm’s perfor-
mance during the pandemic. The less employees of a firm are required to work within
restricted physical limits, more it is likely that such firms are not subjected to manda-
tory cessation of production. If such perspectives had also been considered when decid-
ing the industrial lockdown, maybe some firms could have continued production even
during the pandemic. In other words, the fostering of automation in industrial produc-
tion processes could be a potential solution to avoid production shut down during a po-
tential new pandemic wave.

Figure 1 The Evolution of Political Uncertainty in Italy and Europe. Notes: this figure depicts the dynamics
of the Economic Policy Uncertainty Index for Italy (left axis, red line) and Europe (right axis, blue line).
Data at monthly frequency have been retrieved from https://www.policyuncertainty.com/.
Sample: 2008:M1-2020:M4
The effects of political uncertainty on the real economy are well

known. However, the recent and still ongoing pandemic comes with
unprecedented EPU levels, in particular in the US as well as globally
[fig. 2]. According to Baker, Bloom, Davis (2020) this is due to the fact
that the COVID-19 has boosted several aspects of uncertainty: (i) un-
certainty related to the disease (e.g. degree of infectiousness, lethal-
ity and mortality rate, capacity and efficiency of the health system,
timing and development of vaccines); (ii) uncertainty induced by so-
cial distancing measures (e.g. duration and stringency of the imple-
mented measures, probability of further lockdowns, implementation
of new mitigation and containment strategies) and (iii) economic-re-
lated uncertainty (e.g. policy effectiveness, recovery timing, the num-
ber of firms at risk of default). COVID-19 induced uncertainty is not
strictly related to macroeconomic policy issues, but it also includes
health and science-related topics,2 which have been shown to be sig-
nificant business cycle drivers (Donadelli, Gerotto 2019). This is al-
so confirmed by the rise observed in the World Pandemic-related un-
certainty index over the past three months [fig. 3].
2 The efficiency of the health system and the ability of the scientific community to
provide quick feedbacks to the policymakers played a key role in the evolution of the
pandemics. The complex cooperation between local health systems, governments and
the World Health Organization (WHO) is responsible for increasing COVID-19 relat-
ed uncertainty. Furthermore, it is important to underline that further investigations
must be done regarding the relationship between the past public (as well as private)
funding assigned to both the health system and scientific research and the country’s
‘COVID-19 performance’.

Figure 2 The Evolution of Political Uncertainty in the US and in the World. Notes: this figure depicts the
dynamics of the Economic Policy Uncertainty Index for the US (blue line) and World (black line). Data at monthly
frequency have been retrieved from https://www.policyuncertainty.com/. Sample: 2008:M1-2020:M4
According to Baker et al. (2020), the role of the sky-scraping level of

uncertainty generated by the pandemic concerns the effectiveness
of economic policies and thus the length of recovery times, especial-
ly in some sectors. According to the authors, half of the US GDP con-
traction is due to COVID-19 induced-uncertainty, and standard EPU
accounts only for 50% of the drop.
Figure 3 The Evolution of Pandemic-Related Uncertainty in the World. Notes: this figure depicts
the dynamics of the World Pandemic Uncertainty Index (WUPI). Source: FRED. Sample: 2008:Q1-2020:Q1
In this respect, the implementation and the subsequent communica-

tion of efficient strategic economic-sectoral plans will help to mit-
igate part of this uncertainty, allowing the Italian economy, and in
particular those sectors that have never recovered from past crises,
to breathe again. In a country like Italy, already weakened by previ-
ous economic crises (i.e. the subprime and the sovereign debt crises)
and constrained by the extremely high level of public debt, solving
the COVID-19 induced uncertainty has to be considered a priority.
The absence of a national industrial policy able to solve, at least par-
tially, the uncertainty generated by this health emergency, amplified
by weak and confused government economic measures, as well as
by litigious EU economic policy makers, can be lethal especially for
sectors such as (i) hospitality and tourism, (ii) transport and storage,
and (iii) art, leisure and entertainment.
In this chapter, we assess the macroeconomic implications of COV-
ID-19 induced uncertainty on company revenues, gross operating mar-
gin and employment in 16 different Italian sectors by means of a stand-
ard VAR analysis. Our results confirm COVID-19 induced uncertainty to

be detrimental for the majority of Italian sectors, with significant drops
in revenues and gross operating margin. ‘Construction’, ‘education’,
‘manufacturing activities’, ‘professional, scientific and technical activ-
ities’ and ‘hospitality’ are among the most seriously affected sectors.
2 Empirical Analysis
Data and methodology
From ISTAT we retrieve revenues, gross operating margins and em-

ployment data for Italian businesses across 16 ATECO sectors.3 Un-
fortunately, the aggregated company data available in the ISTAT
database are recorded with annual frequency. Standard linear in-
terpolations are performed to obtain quarterly figures with the aim
to match the quarterly frequency of our uncertainty measure. As
measure of political uncertainty, we employ the EPU index of Bloom,
Baker and Davis.4 All data run from 2008:Q1 to 2017:Q1.
During the subprime crisis,5 EPU for Italy settled at 97.93. The
average Italian EPU after the lockdown (March and April 2020) was
218.32, more than twice compared to the great financial crisis era
of 2007-09. Prometeia (2020) shows that the impact of COVID-19 is
not symmetric across sectors. Thus, following these estimates and, in
the spirit of Baker et al. (2020) and Caggiano, Castelnuovo, Figueres
(2020), we reparametrize our calculations accordingly. Specifical-
ly, we calibrate the magnitude of the uncertainty shock due to COV-
ID-19 to be 2.3 times higher than during the subprime crisis in all
sectors, except for ‘hospitality’ and ‘art, leisure and entertainment’,
for which a factor of 3 and 2.8 is used, respectively. Our choice of re-
scaling the size of EPU shocks in all sectors is motivated by the fact
that political uncertainty will last for several months. In addition,
we believe that the ongoing and future social distancing measures
(including several travel restrictions) in addition to the anxiety and
general bad mood induced by COVID-19 will certainly have stronger
recessionary effects on tourism and leisure activities. For this rea-
son, we applied an even higher factor for the ‘hospitality’ and ‘art,
leisure and entertainment’ sectors.
In the spirit of Baker et al. (2020) and Caggiano, Castelnuovo,
Figueres (2020), we estimate the impact of COVID-19 by means of
3 ATECO is the coding system used by the National Institute for Statistics (ISTAT) to clas-
sify national economic activities. It complies with the European nomenclature, Nace Rev. 2.
4 See https://www.policyuncertainty.com/.
5 Note that this occurred from October to December 2008.

standard bivariate VAR models. We thus ask: what is the effect of an

EPU shock in the 16 ATECO sectors, once the greater magnitude of
EPU induced by COVID-19 is accounted for?
Evaluating and understanding the impact of COVID-19 pandemic on
the economy is rather challenging. News-based uncertainty metrics
do not capture direct effects of COVID-19 (such as lockdowns or oth-
er social distancing measures and infection dynamics or other health-
related issues) and our analysis focuses on COVID-19 induced-uncer-
tainty shock only. Actually, even though there are similarities between
the subprime crisis and the COVID-19 one, especially in terms of in-
creased economic-policy uncertainty, we have no knowledge yet about
the persistence of this crisis given the risk of further waves of conta-
gions. In addition, EPU hardly takes into account likely drops in fu-
ture productivity due to social distancing measures and the reduction
of investments. In other words, our approach is not capturing all the
dimensions of uncertainty induced by the COVID-19. In this respect,
one could expect stronger impact than those observed in our analysis.6
Results
Figure 4 shows the impulse response of COVID-19 induced uncertain-

ty on company revenues [fig. 4]. The overall impact of COVID-19 on to-
tal revenues is negative in most sectors. The most affected sectors are
‘construction’, ‘education’, ‘manufacturing activities’, ‘business sup-
port services’ and ‘hospitality’, which also show the longest recovery
time (i.e. almost 18 months). Note that the daily activity of these sec-
tors has been interrupted from 21 March 2020 to mid-May 2020 by the
Italian government due to social distancing measures. It is worth not-
ing that in the majority of sectors heavily hit by the COVID-19 growth
has shown a negative trend over the period 2008:Q1-2017:Q1. The COV-
ID-19 is thus worsening a pre-existing critical economic outlook, in
particular in those sectors that have never fully recovered from the
2007-09 financial crisis and the sovereign debt crisis. In general, the
short-run drop vanishes within 12 quarters in most sectors. In other
words, only after three years these sectors are supposed to return to
their long-term equilibrium production and employment levels.
Exceptions are the ‘electricity and gas supply’ and ‘health and so-
cial care’ sectors, which show a positive response following a COV-
ID-19 induced uncertainty shock. However, the positive effect is sta-
tistically significant only in the “electricity and gas supply” sector
from two quarters after the shock.
6 Not surprisingly as of June (2020) the IMF revised its estimates on the real GDP
growth for 2020 indicating a worsening across G7 countries.

Figure 4 COVID-related uncertainty impact on company revenues (% deviations from mean).

Notes: this figure depicts impulse responses (expressed as deviations from long-term mean) of company
revenues (in different economic sector) to a COVID-19-related uncertainty shock. For each sector the impulse
response function is estimated from a bivariate-VAR where COVID-related uncertainty is ordered first.
Black solid lines and dashed black ones: point estimates and 68% percent confidence bands.
Data on company revenues are from the ISTAT. Sample: 2008:Q1-2017:Q1
Estimates on gross operating margin are presented in figure 5 and

show a very similar pattern compared to revenues [fig. 5]. Once again,
the sectors most adversely affected by the COVID-19 are ‘construc-
tion’, ‘education’, ‘manufacturing activities’, ‘business support servic-
es’ and ‘hospitality’. Dynamics in figure 5 indicate also that in these
sectors the effects of the pandemic will last for almost two years.
Differently from aggregate revenues, the impact on the gross oper-
ating margin is found to be larger in magnitude. For instance, ‘con-
struction’, ‘hospitality’ and ‘art, leisure and entertainment’ drop by
more than 3%.
Figure 5 COVID-related uncertainty impact on employment (% deviations from mean).

Notes: this figure depicts impulse responses (expressed as deviations from long-term mean) of company gross
operating margin (in different economic sectors) to a COVID-19-related uncertainty shock. For each sector the
impulse response function is estimated from a bivariate-VAR where COVID-related uncertainty is ordered first.
Black solid lines and dashed black ones: Point estimates and 68% percent confidence bands.
Data on company revenues are from the ISTAT. Sample: 2008:Q1-2017:Q1
Lastly, we present and discuss the estimated COVID-19 impact on

the number of employed workers in each sector [fig. 6]. Estimates are
generally less significant with respect to the previous cases. Never-
theless, similar conclusions can be drawn. ‘Business support servic-
es’ show the highest (negative) impact on employment, with a drop
of -0.5% after one quarter and a full recovery not earlier than three
years, followed by ‘education’ with almost -0.5% after six months. A
key difference with respect to responses on revenues and gross op-
erating margin regards the recovery time. Due to certain rigidities
in the labour market, the effects of COVID-19 induced uncertainty
Figure 6 COVID-related uncertainty impact on employment (% deviations from mean). Notes: this figure
depicts impulse responses (expressed as deviations from long-term mean) of company employment (in
different economic sectors) to a COVID-19-related uncertainty shock. For each sector the impulse response
function is estimated from a bivariate-VAR where COVID-related uncertainty is ordered first. Black solid lines
and dashed black ones: point estimates and 68% percent confidence bands. Data on company employment
level are from the ISTAT. Sample: 2008:Q1-2017:Q1
shocks on employment are more persistent. It is important to under-

line that – at the end of 2019, before the virus spread – Italy was one
of the EU countries with the highest unemployment rate (9.9% com-
pared to an EU average of 6.7%).7 The slowdown of the economy in-
duced by COVID-19 is undoubtedly worsening a pre-existing Italian
economic scenario. With regard to ‘hospitality’, it is noteworthy that
employment levels follow a seasonal trend and most of the workers in
7 Source: Word Bank data, Total Unemployment (% of total labor force).

this sector are hired during the tourist season (i.e. from May to Oc-
tober). The consequences on employment are thus likely to be worse
than those estimated in figure 6.
Finally, table 2 shows the cumulative impact of COVID-19 at 6, 12
and 18 months after the EPU shock. On average, the impact on rev-
enues after 18 months is -2.1%. Estimates on GOM depicts a more
dramatic framework among Italian sectors. The average cumulative
impact equals -3.4% after 6 months, -4.5% after 12 and -5% after 18.
Clearly, many Italian sectors are not going to recover quickly from
this pandemic.
Table 2 Cumulative impact of COVID-19 (% deviations from the mean)
Moths Mining Manfactu- Electricity Water Construc- Retail Transport Hospitality

after ring and gas and tion and storage
the activities supply multi-
shock utilities
6 Rev -1.549 -1.532 1.713 -1.574 -3.024 -1.059 -1.478 -1.403
GOM -1.777 -4.973 0.030 -2.847 -7.148 -3.943 -4.374 -5.832
E -0.836 0.094 0.391 -0.091 -0.204 -0.364 -0.004 0.009
12 Rev -2.569 -2.147 2.994 -2.286 -4.177 -1.488 -2.059 -2.010
GOM -1.945 -7.000 0.167 -4.365 -10.260 -5.759 -6.614 -8.065
E -1.501 0.206 0.727 -0.187 -0.508 -0.620 0.079 0.025
18 Rev -4.303 -2.441 3.710 -2.541 -4.633 -1.665 -2.274 -2.313
GOM -2.031 -7.729 0.248 -5.036 -11.423 -6.572 -7.527 -8.924
E -2.331 0.311 0.943 -0.239 -0.741 -0.783 0.149 0.036
Moths Telecom- Real Business Travel Education Health Art, leisure Other
after munica- estate support and and and enter- services
the tions services rental social tainment and
shock services care activities
6 Rev -0.566 -0.998 -2.103 -0.315 -2.758 0.091 -1.263 -1.549
GOM -1.438 -0.585 -4.169 -2.454 -4.194 0.756 -5.249 -1.614
E 0.095 -0.565 -1.120 -0.050 -0.511 -0.184 0.008 0.579
12 Rev -0.854 -1.383 -2.983 -0.295 -4.140 0.124 -1.809 -2.569
GOM -2.124 -1.018 -5.853 -3.253 -6.673 1.214 -7.259 -2.379
E 0.035 -0.957 -1.768 -0.084 -1.114 -0.471 0.022 0.934
18 Rev -1.019 -1.605 -3.325 -0.284 -4.662 0.140 -2.081 -4.303
GOM -2.505 -1.330 -6.423 -3.621 -7.751 1.351 -8.032 -2.765
Emp -0.005 -1.138 -2.047 -0.113 -1.388 -0.643 0.033 1.116
Notes: this table depicts the cumulative impulse responses of company revenues (Rev), gross operating margin (GOM), and employment
(E) in different economic sectors to a COVID-19-related uncertainty shock after 6, 12 and 18 months. For each sector the impulse
response function is estimated on the basis of a bivariate-VAR where COVID-related uncertainty (i.e, EPU) is ordered first. Data on
company revenues, gross operating margins and employment level are from the ISTAT. Sample: 2008:Q1-2017:Q1

3 Concluding Remarks
Since March 2020, the rising number of confirmed COVID-19 cas-

es around the World has made it necessary to implement a series of
social distancing measures (including lockdowns) aimed at slowing
down the rate of infection. Naturally, these measures have generat-
ed a direct effect on the real economic activity. In particular, a rapid
drop in production and subsequently in employment levels. Even be-
fore the virus was detected in Italy, the country was in a thorny eco-
nomic situation. In fact, it was one of the last EU countries in terms
of economic growth performance and among the first for level of un-
employment and public debt. Certainly, for Italy the economic effects
related to COVID-19 could be more harmful than for other countries.
Measuring the true impact of COVID-19 may be challenging. What
is sure is that this newly declared pandemic has generated an un-
precedented level of uncertainty. Even if not strictly related to eco-
nomics or politics, such uncertainty seems to be induced by topics
associated (on average) with bad news that are well known to be det-
rimental for production.
The lack of clarity in managing the pandemic and the absence of
immediate, efficient and concrete government actions8 failed in re-
storing market confidence and resolving uncertainty. This will lead
to more severe adverse effects on the real economy. Intuitively, un-
clear policies and measures make consumers and businesses more
averse to ambiguity. Consequently, investments and hiring are post-
poned to obtain additional information on future outcomes (Baker,
Bloom, Davis 2016). More importantly, COVID-19 induced uncertain-
ty seems to be responsible for a delay in economic recovery. More
severe and long-lasting negative effects have been found in particu-
lar in the ‘construction’, ‘education’, ‘manufacturing activities’, ‘busi-
ness support services’ and ‘hospitality’ sectors.
COVID-19 hit 208 countries worldwide representing thus a global
shock. In order to mitigate its adverse effects, any government should
implement policies aimed at reducing the overall level of domestic po-
litical uncertainty and slowing down contagions while boosting the
economy. This with the ultimate goals of recovering more quickly.
8 In the case of Italy, it is also important to underline the significant delay of nation-
al government in establishing a scientific-economic committee. The scientific health
committee was formally set up in early February 2020, whereas the economic one was
established only in April 2020. First lockdown measures started in early March 2020
whereas industrial shutdown was declared from mid-March 2020. Since containment
policies aimed to protect population health also affect economy, the government should
have defined earlier and more concisely the economic compensation policies. By imme-
diately identifying the optimal mix between containment policies and economic com-
pensation this would have reduced the overall uncertainty induced by the COVID-19
pandemic as well as its negative impact on economy.

Indeed, uncertainty related to this pandemic may represent the

trigger of a deep change in the current paradigm of economic devel-
opment. The need of a different approach to the economic growth has
been widely recognised over the last 10 years. The tackling of climate
change, inequality and hunger are at the centre of the world debate
from many years and still local governments lack of concrete actions in
their policy strategies. This ‘new world’ re-designed by the pandemic
represents the perfect field to put finally such strategies into actions.
Close cooperation between EU members represents a fundamen-
tal element for the success of any economic, as well as health, policy
identified by each country. In the last years, European Union played a
central role in boosting innovation in green technologies sector for in-
stance, but such specific interventions are not enough now to address
the economic challenge drawn by the COVID-19 virus. The institution-
al role of EU and its economic policy in response to ongoing COVID-19
induced crises are crucial for the economic recovery of the continent.
Italy has been in need of a consistent industrial policy for many
years. The labour market was subject to different reforms but all
of them were constrained by the high level of political uncertainty.
Digitalisation and sustainability topics were key elements of sever-
al electoral programmes but they remained so even after the elect-
ed government settled. The current pandemic has emphasised the
effect of policymakers’ behaviour to postpone such interventions,
which instead firms necessitated even before the COVID-19 diffu-
sion. Italian policymakers identified short-term solutions to support
the economy during the pandemics, and contain the virus diffusion
at the same time, by selecting specific industrial sectors to exclude
from the mandatory cessation of production and providing econom-
ic compensation measures to the others. In a medium term perspec-
tive, it is very unlikely that this solution to be optimal for the nation-
al economy. In addition to the traditional economic policies aimed at
fostering the growth of an economy after a shock like this one, poli-
cymakers are called to identify specific interventions aimed at sup-
porting firms’ innovation so that production to continue even during
a second potential wave of pandemic (i.e. supporting automation of
industrial process, home automation, digitalisation, implementation
of smart working system...).9 The success of such instruments is con-
ditioned by the presence of a high level of efficiency in public insti-
9 With reference to the Italian case and the economic measures to be adopted for
those sectors affected the most by this pandemic, the different entrepreneurial per-
spectives at regional level must be taken into account. As also during the pandemic,
the governors of the regions will play a central role on this aspect. Since the Italian
firms’ environment is characterised by a significant level of family-owned SME, a spe-
cific dialogue with each trade association must be open to understand the different en-
trepreneurs’ perspectives.

tutions, infrastructures and national health care system. Thus, eco-

nomic reforms must focus also on these aspects.
With reference to the health system in particular, we underline
the importance of a close cooperation and coordination between pri-
vate and public health institutions, as well as of the role played by
academic research. Regulations regarding the former must be re-
defined learning from the experience of the last months of pandem-
ics (by increasing the employees in the sector, the compliance of the
health structures to operational and safety standards in line with the
pandemic critical issues and the level of technological endowment…),
so that the uncertainty related to the pandemic is reduced. In addi-
tion to that, public funding strategies for these sectors must be re-
organised with a specific attention to their contribution in respond-
ing to the emergency. Reducing the uncertainty in public funding in
these two sectors could increase their qualitative performance and
outputs, which in turn can be considered as a key element to prevent
or manage the next pandemic wave.
Bibliography
Baker, S.R.; Bloom, N.; Davis, S.J. (2016). “Measuring Economic Policy Uncer-
tainty”. The Quarterly Journal of Economics, 131(4), 1593-636. https://
doi.org/10.1093/qje/qjw024.
Baker, S.R.; Bloom, N.; Davis, S.J.; Terry, S. (2020). “Covid-Induced Econom-
ic Uncertainty”. NBER Working Paper no. 26983. https://www.nber.org/
papers/w26983.
Bernanke, B.S. (1983). “Irreversibility, Uncertainty, and Cyclical Invest-
ment”. The Quarterly Journal of Economics, 98(1), 85-106. https://doi.
org/10.2307/1885568.
Caggiano, G.; Castelnuovo, E.; Figueres, J.M. (2017). “Economic Policy Uncer-
tainty and Unemployment in the United States: A Nonlinear Approach”.
Economics Letters, 151, 31-4. https://doi.org/10.1016/j.econ-
let.2016.12.002.
Caggiano, G.; Castelnuovo, E.; Kima, R. (2020). “The Global Effects of Covid-
19-Induced Uncertainty”. Bank of Finland Research Discussion Paper No.
11/2020. https://ssrn.com/abstract=3623226.
Caggiano, G.; Castelnuovo, E.; Pellegrino, G. (2017). “Estimating the Real Ef-
fects of Uncertainty Shocks at the Zero Lower Bound”. European Eco-
nomics Review, 100, 257-72. https://doi.org/10.1016/j.euroecor-
ev.2017.08.008.
Donadelli, M.; Gerotto, L. (2019). “Non-Macro-Based Google Searches, Uncer-
tainty, and Real Economic Activity”. Research in International Business and
Finance, 48, 111-42. https://doi.org/10.1016/j.ribaf.2018.12.007.
Prometeia (2020). Italy in the Global Economy. Prometeia Brief, April 2020 - no.
20/3. https://rb.gy/lqasfw.

Part 7
Pensions and Insurance
233
The Implications of the COVID-19

Pandemic for Pensions
Charles Sutcliffe
The ICMA Centre, Henley Business School, University of Reading, UK
Abstract COVID-19 and the lockdowns have had a big global economic effect, as well
as increasing mortality. We examine the effects of COVID-19 and the resulting relaxa-
tions of pension regulations on pension schemes. Those who transfer their pension or
withdraw cash from their pension pot while asset prices are depressed by COVID-19 are
losers; as are members of defined benefit schemes with a deficit whose employer fails
due to COVID-19. The increased mortality from COVID-19 will have a minimal effect on
pensions. If economies recover to pre-COVID-19 levels, the long run effects on pensions
should be small.
Keywords Pensions. COVID-19. Coronavirus. Longevity. Mortality. Lockdown. Pension

contributions. Pension transfers. Pension scams. Pension withdrawals. State pensions.
Summary 1 Introduction. – 2 Types of Pension Scheme. – 3 Longevity. – 4 State

Pensions. – 5 Asset Values. – 6 Discount Rate. – 7 Companies. – 8 Members. – 9 Regulation.
– 10 Conclusions.
1 Introduction
The COVID-19 pandemic and the associated lockdown has had big negative ef-
fects on national economies – sharply reduced gross national product (GNP),
depressed share prices, considerably increased unemployment, forced firms
into liquidation, reduced interest rates, lowered government tax revenues, and
caused very large amounts of government spending. The economic consequen-
ces of COVID-19 have affected pension schemes in a variety of ways. In addi-
tion, COVID-19 has led to the death of hundreds of thousands of people glo-
bally, which also has implications for pension schemes and annuity providers.

ISBN [ebook] 978-88-6969-442-4
Open access 235
DOI 10.30687/978-88-6969-442-4/017
Charles Sutcliffe
2 Types of Pension Scheme
There are two main types of pension scheme – defined benefit (DB)

and defined contribution (DC) (Sutcliffe 2016). DB schemes are offe-
red by employers (sponsors), and promise to pay a pension calcula-
ted using either a member’s final or average salary, and the number
of years of membership of the scheme (accrued years). Both the em-
ployer and members make contributions which are a percentage of
the member’s salary. This money is then invested in a pooled man-
ner by the DB scheme to provide the cash to pay the promised pen-
sions. Every year (or every three years in the UK) each DB scheme
undergoes an actuarial valuation when the assets are compared with
the present value of the scheme’s liabilities, i.e. the promised pen-
sions. This may lead to a change in both the member and employer
contribution rates, although the ultimate responsibility for meeting
the pensions promise lies with the employer.
DC schemes receive contributions from both the members and
their employer, and this money is paid into segregated pots of money,
each ‘owned’ by the member concerned. Members can usually choo-
se how their pot of money is invested (although the vast majority do
not), and when they retire they choose what to do with the final va-
lue of their pot of money – buy an annuity, take it in cash, or go into
drawdown (i.e. invest the money and make withdraws as required).
The relative importance of DB and DC schemes in terms of assets
and accrued liabilities differs between countries, as shown in table 1.
Table 1 asset split between DB and DC occupational schemes and total assets
in 2019 (Willis Towers Watson 2020b)
Japan Canada Netherlands UK US Australia

DB 95% 95% 94% 82% 39% 14%
DC 5% 5% 6% 18% 61% 86%
Assets US$ bn. 3,386 1,924 1,690 3,451 29,196 2,077
3 Longevity
By 17th June 2020 there were 8,006,427 confirmed cases of COVID-19

globally, including 436,899 deaths, reported to the World Health Or-
ganization (WHO 2020). The death of many members and pensioners
from COVID-19 has reduced the liabilities of DB pension schemes, as
the deceased will not receive any pension payments. The death of a
pensioner terminates their pension, leaving only a spouse’s pension,
which is usually half the full pension. The death of an active member
results in a death-in-service payment, which is generally a lot less
Charles Sutcliffe
than the actuarial value of the pension they would otherwise have
received. Similarly insurance companies, who sell annuities mainly
to former members of DC schemes, will also benefit. The death of an
annuitant terminates the annuity payments, although survivor be-
nefits (e.g. spouses) may continue at a much reduced rate. The size
of these beneficial effects of COVID-19 for DB pension schemes and
insurance companies is unclear. There may be repeat waves of CO-
VID-19 infection, and increased deaths from other causes indirectly
caused by COVID-19, e.g. the temporary withdrawal of treatment for
some medical conditions, people not seeking medical treatment due
to the fear of contracting COVID-19, the damage caused by COVID-19
to the health of those who have recovered shortening their longevity,
etc. Cairns et al (2020) modelled the likely effects of COVID-19 on UK
longevity, and concluded that the main effect is to advance the date
of death by a few years, e.g. people who would otherwise have died
at age 85, are dying at the age of 80 (40% of deaths from COVID-19
in the UK were aged over 85). The implication of this model is that
the beneficial effect of COVID-19 for DB schemes and annuity provi-
ders from the elevated death rate is small; and makes little differen-
ce to the funding of DB schemes and the price of annuities. In short,
UK mortality has been declining over time, but COVID-19 has incre-
ased it to its level in 2008.
4 State Pensions
State pension schemes often have unique and complicated designs.

Many state pensions, e.g. the UK, are pay-as-you-go with contribu-
tions by current employers and employees used to pay current pen-
sions. Other state pensions are funded, and invest the contributions
to pay the promised state pensions at a later date, e.g. China. CO-
VID-19 has affected state pensions in a variety of ways.
Following COVID-19, the Finnish government temporarily redu-
ced the employers’ state pension contribution rate by 2.6% until the
end of 2020, and will finance this using a reserve fund. The reduc-
tion in contributions will be recouped from employers by increasing
their contribution rate for 2022-25. COVID-19 may lead to reductions
in US Social Security benefits, as they are based on the US average
wage index. Biggs (2020) has forecast that COVID-19 will automati-
cally reduce US Social Security expenditure. He has estimated that,
if this index drops by 15% in 2020, Social Security benefits for those
aged 60 in 2020 will be around 13% per year lower when they reti-
re. This will lower the cost of US Social Security and extend the da-
te when it runs out of money to beyond 2034 (OASDI Trustees 2020).
However, the large increase in the US unemployment rate from 3.5%
in February 2020 to 14.7% in April 2020 has reduced total Social Se-
Charles Sutcliffe
curity contributions paid by employees and employers (US Bureau of

Labor Statistics 2020). There has also been a small increase in So-
cial Security payments, due to unemployed workers retiring early.
These effects may bring the date of exhaustion of the Social Securi-
ty fund forward to 2029 (Gladstone, Akabas 2020).
The very large cost of COVID-19 to governments, in terms of sup-
porting individuals and companies, and the drop in tax revenues from
the reduction in economic activity may have a negative effect on the
level of state pensions as governments seek to offset the costs of CO-
VID-19. Since 2011 the UK has had a “triple lock” on annual increases
in the state pension; which must rise by at least the highest of infla-
tion, average earnings growth and 2.5%. The Social Market Founda-
tion has estimated that removing 2.5% to leave a “double lock” would
save the government £4 billion per year (Corfe 2020).
Since over eight million UK workers have been furloughed on 80%
of their wages, average earnings are forecast by the Office for Bud-
get Responsibility (OBR 2020) to drop by 7.3% in 2020. So state pen-
sions will rise by the guaranteed minimum of 2.5%. For 2021, after
the furlough has ended, average earnings should rise by 7/93 = 8%,
while the OBR has forecast they will increase by 18.3%. If this OBR
forecast is correct state pensions will also rise by 18%, unless the
rules are changed.
Some governments have set aside a specific revenue stream, e.g.
North Sea oil, to create a sovereign wealth fund to provide for state
pensions (e.g. Norway, Chile, Ireland, France, China). Governments
seeking to fund their COVID-19 expenditure and loss of revenue may
draw money from their sovereign wealth fund. Norway has a $1,000
billion sovereign welfare fund (the Government Pension Fund Glo-
bal, GPFG) which receives government revenues from North Sea oil.
Due to the pressures on government finances caused by COVID-19,
the 2020 Norwegian budget has been amended, and instead of paying
$0.4 billion into the GPFG, the Norwegian government will withdraw
$38 billion from the fund. Further withdrawals from the GPFG may
be needed in subsequent years. In France, as well as suspending
major pension reform due to COVID-19, the French Pension Reserve
Fund (FRR) will pay at least an additional €13 billion to help finan-
ce state pensions.
5 Asset Values
COVID-19 and the associated economic disruption has led to drama-

tic falls in stock markets around the world. From 12th February 2020
to 23rd March 2020 the FTSE 100 and S&P 500 indices both fell by
34%, although they then rose. As DB and DC pension funds hold lar-
ge amounts of equities, this caused big reductions in the value of the
Charles Sutcliffe
assets available to pay pensions. During the first quarter of 2020 the
value of US DB pension assets dropped by 14.9%, and the value of UK
DB pension assets dropped by 19.7% (Evestment 2020). For DB sche-
mes this led to a deterioration in their funding ratios (i.e assets/liabi-
lities); while the pension pots of DC scheme members became smaller.
If DB schemes have a deficit they need to eliminate it over a num-
ber of years, usually by additional contributions. Higher contribu-
tion rates will put extra financial pressure on employers, leading
them to reduce their dividends, investment, and other discretionary
expenditure. There may also be an increase in the contribution ra-
te for members, reducing their disposable income and incentivising
them to leave the pension scheme and become deferred pensioners.
For DC members the drop in asset values has reduced the expected
size of their pension pot at retirement, which may mean they need
to work longer before they can afford to retire.
The drop in equity prices caused by COVID-19 may be a short term
phenomenon having little long term effect, with DB scheme funding
and the value of DC pension pots recovering to their pre-COVID-19
levels. However, even if this happens, there will be losers. In some
countries active members of DC schemes are allowed to withdraw
money from their pension pot before they retire. Those members who
transfer out of a DB scheme, or who cash in part of their DC pension
pot before asset values recover, will be losers. To prevent this the Ca-
nadian government has placed a temporary ban on pension transfers
and the purchase of annuities (Government of Canada 2020). In the
UK DB scheme members can transfer their accumulated benefits to
a DC scheme and, if they are over the age of 55, withdraw some or
all of the money in their new DC pension pot. Transferring out of a
DB scheme when asset values are depressed results in a low valua-
tion of the member’s accumulated pension benefits (the cash equiva-
lent transfer value) that are transferred to the DC scheme, and the-
refore a poor deal for the member.
Australia has allowed unemployed members to remove $20,000
from their pension pot, leading to a sharp increase in withdrawals.
The US CARES Act 2020 allows DC scheme members to withdraw up
to $100,000 from their pot without penalty (Anzalone 2020), and 30%
of US DC scheme members have withdrawn money from their pen-
sion pots since the COVID-19 pandemic (Berger 2020). Iceland has
allowed withdrawals from pensions of up to €75,000, regardless of
age. While helping to deal with the immediate pressures of COVID-19
on household budgets, withdrawals reduce the size of pension pots
available to finance retirement. It also means members are liquida-
ting their pension assets when values are low.

Charles Sutcliffe
6 Discount Rate
COVID-19 has resulted in cuts in interest rates to exceptionally low

levels, e.g. the Bank of England rate went from 0.75% on 11th March
2020 to only 0.10% on March 19, 2020. Cuts in interest rates reduce
the discount rate used to compute the present value of DB scheme
liabilities, leading to larger liabilities and reductions in scheme fun-
ding ratios. This may result in higher pension contributions being re-
quired from employers and members, and members leaving or decli-
ning to join DB schemes due to the higher cost.
Most DB scheme members in the UK and US are in the public
sector (e.g. civil servants, armed forces, police, teachers, NHS, fi-
re fighters). Almost all these UK schemes are unfunded, and contri-
butions are set using the forecast rate of UK economic growth to di-
scount the liabilities. It is widely forecast than COVID-19 will result
in a substantial drop in long-term economic growth rates, with nega-
tive growth in the short run. This will increase the liabilities of un-
funded public sector schemes, requiring higher contributions by pu-
blic sector employers and scheme members.
7 Companies
By June 9, 2020 8.9 million workers in the UK had been furloughed

(i.e. supported by the government not to work), and 2.5 million self-
employed workers were also being supported by the government
(BBC 2020). A further 2.1 million were claiming unemployment be-
nefits in April 2020 (ONS 2020). The UK pensions regulator has allo-
wed employers to defer making their agreed deficit repair contribu-
tions to restore the funding of their DB schemes for three months or
longer, on condition they do not pay any dividends during the defer-
ment period and receive agreement from their trustees. This offer
has been taken up by more than 10% of UK DB schemes. UK sche-
mes are also free to alter the employer’s contribution rate for DB
and DC schemes, provided the scheme rules are followed; and De-
loitte and the Financial Times have substantially reduced their DC
contribution rates on a temporary basis. Only 15% of UK DB sche-
mes plan to make up for these temporary reductions in contribu-
tions by making additional contributions in the future (Willis Towers
Watson 2020a). Most UK DB schemes are cash flow negative, so su-
spending employer contributions may increase the sale of assets at
depressed prices. Cuts in dividends will also reduce the income re-
ceived by pension funds on their equity holdings, e.g. Royal Dutch
Shell has cancelled its £2 billion dividend. Given the financial pres-
sures on employers, the UK pensions regulator will not pursue em-
ployers who are late in making their pension contributions; although
Charles Sutcliffe
it will pursue employers who do not pass on the member contribu-

tions deducted from salaries.
Due to the financial pressures on employers from COVID-19, em-
ployers in the Netherlands have been allowed to delay making their
contributions to DB schemes, as have those in Bulgaria; while Ger-
man employers have been allowed to delay making DB deficit repair
contributions until 2021. Finland has also allowed employers to su-
spend contributions by themselves and their employees to occupa-
tional schemes for up to three months, and US employers have redu-
ced or suspended their contributions to DC schemes (Mitchell 2020).
In order to reduce their workforce due to the economic effects of
COVID-19 on their revenue, some companies may offer early retire-
ment on more generous terms. Providing these enhanced terms will
deplete the funding of DB schemes.
The lockdown and associated drop in income will result in corpo-
rate failures. For those firms with DB pension schemes, this may me-
an their DB scheme has a deficit, and is unable to meet its pensions
promise. In some counties such schemes enter a government autho-
rised compensation scheme such as the Pension Protection Fund in
the UK, and the Pension Benefit Guarantee Corporation in the US.
COVID-19 will put pressure on the finances of these compensation
schemes, and this will probably lead to an increase in the levies they
impose on DB schemes.
8 Members
Most of those made unemployed by COVID-19 will probably beco-

me deferred pensioners, or perhaps transfer their pension to ano-
ther scheme. Oku (2020) has estimated this will increase the number
of dormant pensions in the UK by 32%, and the deferred pensioners
may lose track of these pensions. Older people who are made unem-
ployed may decide to retire and start collecting their DB pension, or
cash in their DC pension pot, while still looking for work. This will re-
duce the size of their annual DB or DC pension because they will be
retired for longer. For those who continue to be employed, pressure
on household finances and the possibility of higher contribution rates
has meant that three million UK members of DC schemes have redu-
ced or stopped their contributions, which will reduce the size of their
pension pots at retirement. Similarly in the US, 47% of DC scheme
members have lowered or stopped their contributions (Berger 2020).
The UK pension freedoms of 2015 brought the UK into line with
other counties by allowing DC pensioners to invest their pension pot
themselves, rather than buy an annuity with a guaranteed income
when they retired. These pensioners in drawdown have suffered a
sharp drop in their wealth as a result of the drop in asset values cau-
Charles Sutcliffe
sed by COVID-19. By giving members much more choice over their

pensions, pension freedoms have permitted an increase in pension
scams, and COVID-19 has led to a big increase in such scams. In May
2020 Canada Life (2020) found that since the COVID-19 outbreak be-
gan pension scams in the UK have risen by about 40%, with one mil-
lion people being targeted. This has reduced the pension assets of
the victims, making them more likely to experience poverty in retire-
ment. Many other counties have also warned against pension scams
in connection with COVID-19.
COVID-19 may lead to runaway inflation (Amundi 2020). In the UK
all DB pensions are required to be indexed to inflation up to 2.5%,
and some annuities are also inflation indexed. To the extent that DB
pensions and annuities are subject to limited price indexation, since
asset prices tend to increase with inflation, DB schemes should be
protected or even gain. But pensioners will be losers, as their pen-
sions will rise by less than inflation, reducing the real value of their
pension for the rest of their retirement.
9 Regulation
The response of pension regulators has differed across countries in

terms of suspending employer and member contributions, allowing
members to access their pension assets, and the relaxation of other
regulations. The US CARES Act has suspended the requirement for
DC pensioners over the age of 72 to make minimum withdrawals
from their pension pot. The UK has relaxed its insolvency laws and
now restricts the right of creditors to recover debts, which reduces
the ability of DB schemes and the Pension Protection Fund to pursue
employers for unpaid pension contributions. Due to fears that foreign
investment by Icelandic pension funds would devalue the krona, the
central bank asked them to refrain from making foreign investments
from March 2020 until September 2020. Regulators who have suspen-
ded rules (e.g. employer contributions, member pension withdrawals,
insolvency), extended deadlines (e.g. actuarial valuations, reports to
the pension regulator) and tolerated rule breaches, as well as placed
restrictions on some activities (e.g. paying dividends, discouraging
transfers from DB schemes), must decide when and how to restore
the rules and their enforcement to pre-COVID-19 levels.
10 Conclusions
While COVID-19 has clearly had a negative short run effect on pen-
sions, most of these negative effects should largely disappear in the
long run, depending on the speed and extent to which the economy,
Charles Sutcliffe
asset prices and interest rates recover to pre-COVID-19 levels. Tho-

se who transferred out of a DB scheme, or who cashed in their DC
pot during the period when asset prices were depressed, are losers.
Employers who fail as a result of COVID-19 may have underfunded
DB schemes, and the pension compensation schemes usually repla-
ce most, but not all, of the promised pension. Therefore the members
(but not the pensioners, as they are usually fully compensated) of the-
se DB schemes will also be losers, as will victims of the increased le-
vel of pensions fraud stemming from COVID-19. Pensions regulators
face difficult decisions about when to end their forbearance, and re-
quire employers to revert to pre-COVID-19 regulations and contribu-
tions. They will also need to address the time scale over which emplo-
yers are required to make their deferred contributions. Unless there
is an upsurge in deaths from COVID-19, the benefit to DB pensions
and annuity providers from the temporary increase in elderly morta-
lity will have little short term effect on DB pension schemes, and no
long term effect.
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Cocktail”. Amundi, 9 June. https://bit.ly/39qYFvF.
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to Coronavirus”. PensionBee, 3 June. https://www.pensionbee.com/
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ople: SA: Thousands”. 19 May. https://bit.ly/2WVjla1.
Sutcliffe, C.M.S. (2016). Finance and Occupational Pensions: Theories and
International Evidence. London: Palgrave Macmillan. http://doi.
org/10.1057/978-1-349-94863-5.
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T94re6QIVRevtCh1OYw0wEAAYASAAEgJNIPD_BwE.
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tional Cash is the Answer”. Willis Towers Watson, 20 May. https://bit.
ly/2ZW8XAt.
Willis Towers Watson (2020b). “Global pension Assets Study 2020”. Februa-
ry. https://bit.ly/3eWZcq4.

Insurance Risk Management

During Pandemics
Michalis Ioannides
Director of Credit and Market Risk, Europe, Canada Life Group; ICMA Centre, Henley
Business School, University of Reading, UK
Abstract The insurance sector plays a key role in absorbing systemic risks under nor-
mal conditions and its role is particularly important in taking losses following a pandemic
or natural catastrophe. Strong risk management and contingency planning frameworks
have ensured that insurers and reinsurers are well capitalised to withstand the economic
shock of a pandemic. An estimate of the current impact of the coronavirus puts losses at
more than US $200 billion, half of which is attributed to general insurance business, and
the other half is attributed to losses due to volatile investment markets.
Keywords Solvency 2. Pandemics. Solvency ratio. Credit default risk. Market risks.
Business interruption risk.
Summary 1 Introduction. – 2 A First Glance on the Impact of Pandemics on the

Wider Economy. – 3 The Role of Insurance and the Impact of the Pandemic Crisis on the
Sector. – 3.1 Business Interruption (BI) Cover. – 3.2 Variability in Investment Returns. –
3.3 Sensitivity of Solvency Capital to Key Risk Drivers. – 4 Conclusions.
1 Introduction
Risk management in insurance companies requires careful contingency plan-

ning. The plans incorporate the actions that management would take follow-
ing well predefined stress and scenario tests upon the realisation of very low
probability events. Insurance groups have been well prepared for this crisis
with strong capital positions. Still, the current pandemic raises many ques-
tions regarding the sector’s product offerings and investment portfolio mix.

ISBN [ebook] 978-88-6969-442-4
Open access 245
DOI 10.30687/978-88-6969-442-4/018
Michalis Ioannides
Section 2 of this chapter briefly reviews the impact of past crises on

economic output. Section 3 discusses the role of insurance and the
impact of the current crisis on the sector.
2 A First Glance on the Impact of Pandemics

on the Wider Economy
Severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) will

reclassify1 the emergence of infectious diseases amongst the key top
risks, in terms of impact and likelihood of occurrence, that should
be anticipated in financial institutions’ business planning. Given the
right conditions, COVID-19, the name of the disease caused by the
highly virulent pathogen SARS-CoV-2, unexpectedly spread across
borders to disrupt the longest run of world economic growth on re-
cord, to devastate communities, cities and continents posing unprec-
edented health and financial stability challenges.
This event is not the first pandemic event in history. Pandemics
are amongst the deadliest events in human history. Events such as
the 1918-19 ‘Spanish Flu’ and the medieval 1347-51 bubonic plague
known as ‘Black Death’ tortured the world causing pronounced in-
creases in excess mortality.2 DeWitte (2014) reports that Black Death
is estimated to have killed 30% to 50% of the European population
at that time. In addition to widespread increases in mortality and
morbidity, pandemics can cause fiscal deficits in the short-term and
can be the primary cause for long-term pronounced negative shocks
to economic growth. Table 1 presents a non-exhaustive list of these
events over the last century, and details the significant blow to life
and to the economy that these have delivered in the past.
1 Infectious diseases were kept consistently outside the World Economic Forum’s
(WEF) top five risks. The WEF, in its 2020 Global Risks Report, classified infectious
diseases amongst the top 10 risks in terms of impact, but assigned a lower probability
of realisation than the average probability assigned to other risks (http://www3.we-
forum.org/docs/WEF_Global_Risk_Report_2020.pdf).
2 Excess mortality is a term used in epidemiology and public health to refer to the
number of deaths above the level expected under normal conditions. The World Health
Organisation define ‘excess mortality’ as the “mortality above what would be expected
based on the non-crisis mortality rate in the population of interest. Excess mortality is
thus mortality that is attributable to the crisis conditions. It can be expressed as a rate
(the difference between observed and non-crisis mortality rates), or as a total number
of excess deaths” (https://www.who.int/hac/about/definitions/en/).

Michalis Ioannides
Table 1 Notable pandemics and epidemics and the impact on human life
and the economy. Adapted mainly from Madhav et al. 2018 and other sources
as stated in the table
Starting Event Estimated mortality Estimated economic

Year impact
1918 ‘Spanish Flu’ 20mn-100mn deaths GDP loss of 11% in the US,
(Johnson, Mueller 2002) 17% in the UK and 15%
in Canada (McKibbin,
Sidorenko 2006)
1957 ‘Asian flu’ 0.7mn-1.5mn deaths GDP loss of 3% in the US,
(Viboud et al. 2016) UK, Canada, and Japan
(McKibbin, Sidorenko 2006)
1968 ‘Hong Kong Flu’ 1mn deaths (Mathews US $23bn to US $26bn direct
et al. 2009) and indirect costs in the US
(Kavet 1977)
1981 HIV/AIDS 36.7mn death 2%-4% annual loss in GDP
growth in Africa
2003 SARS 744 deaths across 37 Overall economic loss
countries (Wang, Jolly 2004) of US $50bn (FT 2009)
2009 ‘Swine Flu’ 151.7k to 575.5k deaths GDP loss of US $1bn
(Dawood et. 2012)
2013 Ebola outbreak 11,323 deaths US $2.8bn for Guinea, Liberia
Mainly West Africa and Sierra Leone
(World Bank 2014)
2015 Zika virus outbreak 2,656 reported cases US $7bn to US $18 bn loss
of microcephaly (WHO 2017) in Latin America and the
across 76 countries Caribbean (UNDP 2017)
The coronavirus pandemic is savaging the world economy. By the

end of Q2 2020, the “global economy is in its most precarious posi-
tion since the global financial crisis”,3 and was entering the deepest
and possibly the shortest recession in living memory. That view is re-
flected in the IMF’s recent update on the growth of the world econo-
my. The IMF forecasts a contraction of -4.9% in world GDP, a change
of -1.9% from its previous update in April. At the end of 2019, world
GDP is reported at c. US $142 trillion in purchasing power parity
terms (i.e. international dollars). The IMF’s estimate would imply a
staggering contraction of c. -$6.95 trillion from the 2019 year-end
figure in purchasing power parity terms.
At the time of writing (end of May-mid June 2020), the latest eco-
nomic data point to a rapid slowdown to economic activity resulting
3 Quote from Laurence Boone’s, OECD Chief Economist, article “Tackling the Fallout
from the Coronavirus”, published at https://oecdecoscope.blog/2020/03/02/tack-
ling-the-fallout-from-the-coronavirus/.

Michalis Ioannides
in widespread business closures, near-universal event cancellations,

remote working, and a general disruption of supply chains. Some of
these key risks can be covered privately through insurance.
3 The Role of Insurance and the Impact of the Pandemic

Crisis on the Sector
The insurance sector plays a key role in absorbing systemic risks un-
der normal conditions, and its role is particularly important in tak-
ing losses following a pandemic or natural catastrophe caused by an
earthquake or extreme weather event. Insurers and reinsurers act
as financial intermediaries to provide effective risk transfer of finan-
cial and biometric risks, natural catastrophes and man-made disas-
ters and pandemic risks. Reinsurers provide cover to life insurers
against adverse mortality experience and stand to incur losses as big
as the economic losses inflicted by natural catastrophes. Traditional
retrocession and risk pooling methods provide the mechanisms for
effective risk transfer and accumulation of capital.
For example, the Swiss Re Institute (2020) reports that in 2019,
insurance provided cover for US $60 billion of the US $146 billion
of economic losses inflicted by disasters. This cover is lower than in
each of the previous two years due to the absence of severe hurri-
canes in the US, and is below the annual average of US $75 billion
over the previous 10 years.
SCOR, the French reinsurance group, limits its exposure to natu-
ral catastrophes to 10% of its eligible own funds4 (i.e. €980 million)
and 20% for pandemic risks (i.e. €1.970 billion). SCOR monitors its
key risk drivers and extreme scenario exposures against predefined
risk tolerance limits. Table 2 provides SCOR’s expected loss in ex-
treme scenarios calibrated to the 1-in-200 year single events. The
cost of a pandemic event is estimated just under €1.5 billion.
4 Eligible own funds as the name implies are the insurers/reinsurers’ own capital that
are available to absorb losses. Pursuant to Article 88 of the Solvency 2 Directive (EU
Directive 2009/138/EC), own funds are composed of the excess of assets over liabilities
and subordinated liabilities. Own funds items are classed into three tiers.

Michalis Ioannides
Table 2 Controlling risk appetite. Lessons from SCOR. Source: Company disclosure5
in €mn Risk Capacity* in €mn

North Atlantic Hurricane 660 980
U.S Earthquake 460 980
EU Wind 670 980
Japanese Earthquake 250 980
Terrorist Attack 230 980
Pandemic 1,470 1,970
* The exposure amount by risk that SCOR is willing to accept in pursuit of its
business objectives.
Pandemics could also have serious consequences for insurers. The

economic loss caused in 2003 by the SARS epidemic is estimated at
c. US $50 billion and was mostly attributed to decreased travel and
consumer spending. It is conceivable that all the shocks in table 2
could eventually materialise someday, but it is highly unlikely that
all these single events will occur in the same year.
Today, the current impact of the coronavirus is being felt on both
sides of insurers’ balance sheets. Lloyd’s of London projects total in-
dustry losses6 amounting to more than US $200 billion, half of which
is attributed to general insurance business, and the other half is due
to losses from volatile investment markets. The lines of general in-
surance business that are likely to generate a larger proportion of
the overall insured losses are event-cancellation cover, and US, UK
and European business interruption cover. Other lines such as Con-
tingency, Director and Officers, employment practices liability, gen-
eral liability, mortgage, marine aviation, trade credit and surety and
workers compensation will contribute less to the total insured loss-
es. Other lines of business such as motor classes provide a positive
offset to the bottom-line earnings along with an expected reduction
in expense ratios.
Figure 1 illustrates the industry’s largest reported losses real-
ised in Q1 2020 in the EMEA region [fig. 1]. Munich Re’s and Allianz
Group’s losses are associated mostly with general insurance business
lines, but are mixed with losses realised due to natural catastrophes.
No material COVID-19 claims impact (either mortality or critical ill-
ness) emerged in the first quarter of 2020.
5 Kessler 2019. Presentation to investors.

6 See https://www.ft.com/content/51d32286-5264-4c93-80c3-3d0b0fd4558a.

Michalis Ioannides
Figure 1 Q1 of 2020 pandemic losses reported by selective European insurance groups. The figure illustrates
that in Q1 Munich Re and Allianz Group reported the largest losses associated with the pandemic and natural
catastrophes. Loss estimates reflect the actual figures reported in the interim reporting figures of the selected
insurance groups: * denotes a conversion of the loss in € using the average exchange rate over Q1,
** denotes only travel insurance and disability insurance claims
3.1 Business Interruption (BI) Cover
BI cover protects a business against economic losses due to property

damage inflicted during periods of suspended operation. Most business-
es carry BI insurance as part of their property insurance. In most cas-
es, contagious diseases do not constitute property damage, especial-
ly when passed from person to person. Most of the BI cover provides
cover against flood, fire and other physical damage to buildings. Only
a minority of insurance policies have extensions that provide cover for
infectious diseases. For example, in 2003, Mandarin Oriental hotels in
Hong Kong, Malaysia, Singapore and Thailand suffered economic losses
due to cancellations and reduced restaurant sales stemming from the
SARS outbreak. Mandarin Oriental International Ltd recovered US $16
million from its insurers to pay for such business interruption losses.7
Following the aftermath of the SARS epidemic, insurers sought to
re-design the type of insurance cover offered by adding exclusions for
bacterial or viral infections to their coverage. Most insurers applied
ISO standard wordings to exclude business interruption claims caused
by an infectious disease. However, displeased policyholders, especially
small businesses, argue that these new additions are subject to inter-
pretation. In particular, they argue that policy wording such as the “in-
7 Page 3 of Jardine Strategic Holdings Ltd 2003 Press release recovered from SEC’s
archive at https://www.sec.gov/Archives/edgar/vprr/0401/04010312.pdf.

Michalis Ioannides
ability to use the office due to restrictions imposed by a public author-

ity during the period of insurance following an occurrence of notifiable
human disease” implies that cover is provided for the current crisis.
An industry wide solution is required, and concessions need to be
made. This is a key controversial area and the UK’s financial regula-
tor8 is seeking answers to the question “should insurers remain lia-
ble?” at the High Court in late July. This involves 17 disputed policy
wordings offered by eight insurance groups. This existential battle
for some UK businesses has a global audience, given that European,
US and Asian insurers are also facing the same issue.
3.2 Variability in Investment Returns
The sharp downturn in economic activity resulting from the COVID-19

outbreak has put significant pressure on insurer’s profitability in the
near term, as already reflected in insurers’ equity prices. Figure 2 illus-
trates the sharp change in risk appetite which caused a panic ‘sell-off’
across all major stock market benchmarks [fig. 2]. The shares of insurance
groups in most jurisdictions have also fallen. At the end of Q2 2020, the
sector’s performance, approximated by the fall in the MSCI Global In-
surance Index, experienced a drop of c. 22%. During the Great Financial
Crisis (GFC), the sector experienced a dramatic fall of c. 53%, underper-
forming the broader equity indices, as illustrated in panel 1 of figure 2.
Falling equity prices (panel 1) were accompanied by widening cor-
porate spreads (panel 2), which were marginally offset by declines in
government yields, as illustrated in figure 3. This further exacerbat-
ed the under performance of the insurance sector, relative to broader
stock market indices. Insurance companies’ portfolios are heavily in-
vested in long-term sovereign and corporate bonds, and the market’s
reaction anticipated potential mark-to-market losses on the invest-
ment portfolios of insurers. Large falls in the market prices of corpo-
rate bonds are linked to the widening of credit spreads [fig. 2, panel 2].
These losses are largely offset by gains on government bond portfolios
due to the negative change in government yields [fig. 3, panels 1 and 2].
Over Q1 2020, the dislocation in financial markets was more pro-
nounced in the sub-investment grade corporate bond markets. Figure
2, panel 2, illustrates the widening of the credit spreads across four
different credit indices over three different periods. The change to
the Barclays high yield credit spreads reached levels not seen since
the 2007 GFC, although they fell short of touching the GFC peaks.
This index along with the widening of spreads in investment grade
iBOXX indices indicate pronounced levels of credit risk. These are
8 See https://www.ft.com/content/fafc4037-b86d-4feb-8c98-0ac6afa5da83.

Michalis Ioannides
associated with the weakening credit quality of borrowers in vulner-

able corporate sectors (i.e. the retail, travel, transportation, leisure
and gambling, hotels and oil and gas sectors), some of which operate
with significantly higher liquidity requirements, maturity mismatch-
es and leverage. Further weakening of the corporate sector for the
above reasons could significantly increase the credit downgrade and
default losses experienced by insurance groups.
Figure 2 Equity and bond market performance over selected periods. Source: Author’s calculations,
Bloomberg, IHS Markit. Panel 2 includes the UK Non-Gilts iBOXX 7-10 Year indices that include bonds
rated A and BBB with terms to maturity between 7 to 10. The quotes spread is the change
of the OAS (option adjusted spreads) over the stated period
3.3 Sensitivity of Solvency Capital to Key Risk Drivers
Declines in interest rates are not necessarily associated with strong

solvency9 positions. Life insurance groups’ balance sheets are gener-
ally more sensitive to declines in short-term interest rates. That sensi-
tivity is associated with the long-dated nature of policy holder annuity
9 In Europe, the Solvency 2 directive requires insurance and reinsurance groups to

have enough capital buffers in place over one year to be able to survive with at least a
99.5% probability (i.e. having assets in excess of its liabilities in one year’s time) and then
being able to fully de-risk its balance sheet. In Switzerland, the aim of the Swiss solven-
cy test (SST) is similar. The required capital is calibrated at the 99th percentile. The sol-
vency ratio is defined as the ratio of eligible own funds to the required solvency capital.

Michalis Ioannides
liabilities, and with investment guarantees embedded in the invest-

ment products that are usually wrapped by life insurance contracts.
Life insurance companies usually seek long duration assets, in or-
der to match the long-term duration of their annuity liabilities, and in
effect minimise any duration gaps in their asset and liability manage-
ment processes. This active management is required due to the biom-
etric nature of their liabilities. Life insurance companies are exposed
to changes in life expectancy, which in turn affects the duration of
the insurers’ annuity liabilities. If this change in duration is left un-
managed, it will affect the company’s earnings and solvency capital
position. Therefore, insurers engage actively in managing duration
gaps by ensuring that cash flows from their fixed income portfolio
match the annuity liability outgoings, either through lengthening the
maturity of their asset portfolio, and/or engaging in hedging activity.
Insurance groups also maintain a high-quality asset portfolio, pri-
marily consisting of government bonds, corporate bonds (average
credit quality of A) with limited exposure to sub-investment grade
bonds (i.e. average 2%, but varies between 0% to 8%), and to the most
vulnerable corporate sectors impacted by the coronavirus pandem-
ic. The fixed income portfolios also include portfolios of privately rat-
ed assets (i.e. up to 30% to 40% of the overall portfolio) made up of
commercial real estate loans secured by property assets, equity re-
lease mortgages, infrastructure loans and loans extended to hous-
ing associations and universities.
Panels 3 and 4 of figure 3 illustrate the solvency ratio as at the
year-end 2019 and the change to the solvency ratio of major Euro-
pean insurance groups recorded over Q1 2020, respectively. For in-
stance, AXA’s solvency ratio was 182% on March 31, 2020; down 16%
points on its year-end 2019 position. The negative change in AXA’s
solvency ratio, as for most groups, is mainly driven by unfavourable
market conditions, primarily higher corporate and sovereign spreads
and lower interest rates. Thus far, the COVID-19 crisis and the vola-
tility market environment have depleted earnings and reduced sol-
vency capital within each group’s acceptable ranges. Q1 losses were
offset by positive operating returns for the quarter.
Given that events are still unfolding, credit risk remains a pro-
nounced exposure for European insurers. Groups with holdings of
direct property and commercial real estate loans have provided rent
concessions to tenants in response to the ‘Great Lockdown’ and in
accordance with the authorities’ guidance. Depending on the dura-
tion of this lockdown, these rent concessions could create short-term
cash flow mismatches that could lead to bigger concerns in terms of
liquidity, asset-liability management and capital. If this is prolonged,
insurance groups will experience further downgrades and defaults in
their fixed income portfolios associated with non-financial business-
es operating in the most vulnerable sectors of the economy.
Michalis Ioannides
Figure 3 Long-term rates and solvency of selected European groups. The figure illustrates the levels
and changes to the 10-year government nominal rates and to the solvency levels as reported in the year-end
2019 audited financial disclosures of each insurance group. Almost all European groups are on a Solvency 2
basis. Only Swiss insurance groups, Zurich, Swiss Re and Swiss Life are on a Swiss Solvency Test (SST) basis.
Note: Swiss Re’s (denoted with *) quarterly change to its solvency ratio (panel 4) is an estimate, and not an
actual disclosed figure. Swiss Re noted in its recent quarterly announcement that the Solvency ratio for Q1
2020 is comfortably above 200%
The impact of current defaults remains below the 2009 peak lev-
el.10 AXA has disclosed that its solvency sensitivity is -6% points to
a credit rating migration that assumes a full letter downgrade (i.e.
three notches) to 20% of its corporate bonds (including privately rat-
ed debt). This is not an unlikely scenario given the IMF’s current out-
look on the world economy, as discussed in section 2.
4 Conclusions
Thus far insurance groups have comfortably covered their losses

caused by the current pandemic. The duration of the lockdown im-
pacts the speed of the economic recovery, which in turn determines
10 As per Moody’s most recent default report. This forecasts an increase in sub-invest-
ment grade bond default rates from the current level of 4% to 10.4% by the end of 2020.

Michalis Ioannides
the extent of the impact on the grown of the economy and on the in-
surance sector. Further vulnerabilities in the corporate sector could
lead to further falls in financial markets. This would adversely impact
earnings and could marginally reduce the solvency position of large
life insurance groups. Impairments and revaluations due to credit
rating migrations would further impact investment income, creating
liquidity concerns and asset and liability mismatches. The key focus
is disciplined asset-liability management, through duration exten-
sion and increased use of traditional retrocession. Life annuity writ-
ers could see an increase in their liabilities over the next five years,
driven by a slow down in life expectancy improvements.
In the non-life segment, there is uncertainty around the underwrit-
ing performance of the property and casualty business. Few groups
have withdrawn their earnings guidance partly due to the potential
for further COVID-19 relation claims, as well as the lower investment
yield environment. The current High Court case on business inter-
ruption claims adds litigation and reputational risks to the repertoire
of risks that concern insurers.
Coming out of this crisis, insurance groups will need to re-design
specific product lines to align more closely with policyholders’ needs
and meet regulators’ expectations. Regulators will also be focused
on the adequacy of the industry’s solvency capital, the appropriate-
ness of their regulatory frameworks and on the effectiveness of the
industry’s current risk management frameworks.
Finally, in a post COVID-19 world, governments could play a more
active role in providing pandemic insurance. The US insurance in-
dustry is supporting new legislation that would allow federal states
to share pandemic losses with the industry. This would not be un-
precedented, as the Terrorisms Risk Insurance Act (TRIA), which
was introduced in response to 9/11, allows for a federal loss shar-
ing programme for certain insured losses resulting from certified
act of terrorisms.
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pdf/15500287.pdf.

Part 8
Climate Change
257
Pandemics, Climate
and Public Finance
How to Strengthen Socio-Economic
Resilience across Policy Domains
Stefano Battiston
Università Ca’ Foscari Venezia, Italia; Universität Zürich, Schweiz
Monica Billio
Irene Monasterolo
Vienna University of Economics and Business, Austria; Boston University’s Global Development
Policy Initiative, US; University of Zurich, Switzerland
Abstract The outbreak of COVID-19 and the containment measures are having an un-
precedented socio-economic impact in the European Union (EU) and elsewhere. The
policies introduced so far in the EU countries promote a ‘business as usual’ economic re-
covery. This short-term strategy may jeopardise the mid-to-long-term sustainability and
financial stability objectives. In contrast, strengthening the socio-economic resilience
against future pandemics, as well as other shocks, calls for recovery measures that are
fully aligned to the objectives of the EU Green Deal and of the EU corporate taxation policy.
Tackling these long-term objectives is not more costly than funding the current short-term
measures. Remarkably, it may be the only way to build resilience to future crises.
Keywords COVID-19. Climate change. Public debt sustainability. Green Deal. Fiscal in-
equality. Resilience. Policy complementarity.
Summary 1 Socio-Economic Impact of COVID-19: Is This Time Different? – 2 The Fiscal

and Monetary Policy Response. – 3 Mind the Gap: Misalignment of Current Policies with
the EU Green Deal and EU Tax Policies. – 4 COVID-19 Recovery and Climate Mitigation: A
Role for Policy Complementarity? – 5 Doing More and Better Does not Cost More: A Role
for Policy Complementarity?.

ISBN [ebook] 978-88-6969-442-4
Peer review | Open access 259
DOI 10.30687/978-88-6969-442-4/019
Stefano Battiston, Monica Billio, Irene Monasterolo
1 Socio-Economic Impact of COVID-19: Is This Time

Different?
Unprecedented socio-economic impact. Yet, are estimates too

optimistic? The COVID-19 health crisis is playing a main role in to-
day’s policy, business and financial discussion. The COVID-19 epidem-
ics’ death and infection toll, and the measures (such as lockdown and
social distancing) taken to mitigate it, are expected to drive major
fiscal and macroeconomic impacts globally. In April 2020, the Inter-
national Monetary Fund (IMF) in its World Economic Outlook (IMF
2020) projected the global economy to contract sharply by -3% in
2020, much worse than during the 2008-09 financial crisis. Current
impact and estimates of future impact are already very large. Yet,
the estimates elaborated by the World Bank and the IMF are likely to
be optimistic because they are based on the assumption that Gross
Value Added of sectors such as tourism, remittance, and export will
return to pre-COVID-19 levels by 2021.
Cascading shocks from local to global. The measures intro-
duced to contain the COVID-19 pandemic affected international and
domestic demand triggering immediate demand and supply shocks
on the local economy. In addition, they can induce cascading effects
in the global economy and can be then transmitted to the financial
sector with implications on financial stability. The COVID-19-induced
economic crisis could lead to a new liquidity crisis and higher cost of
debt, affecting public debt sustainability and inequality, in particu-
lar in low-income and emerging countries (Gallagher 2020). In turn,
inequality contributes to accrue the COVID-19 crisis and its effects
on the socio-economic and financial conditions (Ahmed et al. 2020).
Further, FAO1 highlighted that the pandemic has increased the risk of
food crises in 53 countries (representing 113 million people), many of
which are already experiencing acute severe food insecurity. Similar
food crises are likely in vulnerable communities already exposed to
other crises (e.g. the Desert Locust outbreak in the Horn of Africa),2
in Small Islands Developing States that depend on primary exports
and tourism, and in countries relying on remittances.
Is this time different? The COVID-19 crisis is the first large and
global shock originating in the real economy since WWII and spread-
ing to the financial sector. Specific to this shock is that it has hit, at the
same time, both the external and the internal demand sides of many
countries for several months. In particular, shocks on tourism demand,
Contributions: all authors contributed to the development of the paper idea and to ad-
dress the editor’s comments. Stefano Battiston and Irene Monasterolo wrote the paper.
1 http://www.fao.org/2019-ncov/q-and-a/impact-on-food-and-agriculture/en/.
2 http://www.fao.org/news/story/en/item/1258877/icode/.

export prices and remittances affected firms’ production, employment,

nominal wages and households’ income. The shock on internal demand
was then amplified by domestic lockdown measures, triggering self-
reinforcing supply and demand side dynamics. There has been a loss
of social, intellectual and financial capital. For instance, when a sub-
stantial number of firms, large and small, default, and production stalls
for a few months, an important portion of a country’s economic infra-
structure may become severely compromised. This is in stark contrast
with the estimates of standard economic models where shocks are id-
iosyncratic and their impact is fully reversible. In contrast, the socio-
economic impact of the COVID-19 shock appears to be persistent and
self-reinforcing, as analysed more in detail below.
2 The Fiscal and Monetary Policy Response
In this section, we report on the main policy measures introduced

by several countries to mitigate the socio-economic impact of the
COVID-19 shock, and will focus on fiscal and monetary policies in-
troduced in the EU. This information serves as background for the
policy analysis in Section 3.
A wide range of proposals to finance the recovery. It has been
recently highlighted that the speed and duration of the COVID-19 eco-
nomic recovery will depend on the breadth and scope of emergency
government funding (Toporowski, Calvert Jump 2020). In this regard,
several proposals to finance the COVID-19 recovery have been put
forward, including: coronavirus bonds3 and a Covid Credit Line4 with-
in the European Stability Mechanism (in Bénassy-Quéré et al. 2020);
enhanced central banks’ purchasing programmes; liquidity lifelines
(Brunnermeier et al. 2020) to overcome firms’ liquidity shortages; cen-
tral banks’ helicopter money (Couppey-Soubeyran 2020; Galí 2020);
and the expansion of the role and scope of international financial in-
stitutions such as the European Investment Bank (EIB) in the EU.
Fiscal policies. Governments both in high-income and develop-
ing countries have introduced various forms of fiscal policies. These
include increased healthcare spending, reduction or deferred pay-
ment of some taxes, credit support guarantees to companies, expan-
sion of unemployment benefits and income support, payroll support
to the affected sectors (such as tourism) just to name a few. Such
measures have contributed to smoothing the negative impacts of the
COVID-19 lockdown measures on demand and supply (Monasterolo,
Billio, Battiston 2020). The breadth and scope of the measures vary
3 A proposal by Giavazzi, Tabellini 2020.

4 A proposal by Bénassy-Quéré et al. 2020.

significatively across countries. In low income and emerging coun-

tries, the level of government spending ranged from 0.5% of GDP in
Kenya to over 5% of GDP in the Philippines, dwarfing the financial
support provided by development banks (e.g. the World Bank) during
the COVID-19 crisis. In contrast, in advanced economies, COVID-19
fiscal spending was the highest in Germany, where it reached 12%
of (2019) GDP, followed by the US (9.1%), Japan (7%), the UK (4.5%)
and China (4%). In the EU, the European Commission (EC) launched:
1. a €540 billion support to the EU member states via the Euro-
pean Stability Mechanism (ESM) (up to 2% of 2019 GDP for
each euro area country, based on existing precautionary es-
timates) to finance health related spending;
2. €25 billion in government guarantees to the European Invest-
ment Bank (EIB) to provide up to €200 billion of financial sup-
port to corporations, and a €100 billion temporary loan-based
instrument (SURE) to protect workers and jobs.
3. In addition, €37 billion of the EU Budget (about and 0.3% of
2019 EU27 GDP) was mobilised to extend the scope of the EU
Solidarity Fund to incentivize banks to provide liquidity to
small and medium enterprises and mid caps (as a guarantee
to the European Investment Fund). Further, it is also aimed to
support credit holidays to crisis-affected debtors, and to pro-
vide macro-financial assistance to ten countries included in
the EU Enlargement and Neighborhood Partnership.5
4. The EC also enabled EU member states to compensate com-
panies for the damage directly caused by COVID-19, includ-
ing measures in sectors such as aviation and tourism. Overall,
the national liquidity measures, including schemes approved
under temporary, flexible, EU State Aid rules, could lead to
support funding up to a total of €2.9 trillion.
Monetary policies. Given the low interest rate environment, cen-

tral banks around the world have engaged in asset purchasing pro-
grammes, refinancing operations, and foreign exchange operations.
For example, the ECB has taken action on several fronts: it has (i)
expanded the asset purchase programme of private and public sec-
tor securities (Pandemic Emergency Purchase Program, PEPP) to
€ 1.35 trillion until at least June 2021; (ii) revised the Non-Perform-
ing Loans and prudential floor to banks’ current minimum capital re-
quirements; (iii) provided more favourable terms and new liquidity
facilities within the existing targeted longer-term refinancing opera-
tions and a new liquidity facility (PELTRO) of non-targeted Pandemic
Emergency Longer-Term Refinancing Operations; (iv) grandfathered
5 https://ec.europa.eu/neighbourhood-enlargement/node_en.

until September 2021 the eligibility of marketable assets used as col-

lateral in Eurosystem credit operations falling below current mini-
mum credit quality requirements of ‘BBB-’; (v) expanded the range
of eligible assets under the CSPP, and relaxed collateral standards
for Eurosystem refinancing operations (MROs, LTROs, TLTROs) to
include Greek sovereign bonds; (vi) allowed institutions6 to operate
temporarily below the Pillar 2 Guidance (P2G) with regard to the cap-
ital conservation buffer and the liquidity coverage ratio (LCR) of the
Basel III agreement on bank regulation.
3 Mind the Gap: Misalignment of Current Policies

with the EU Green Deal and EU Tax Policies
Climate action. The policy measures discussed above could help to

mitigate the effects of the lockdown and help the economy to bounce
back in the short-term. However, in the long term, they could also neg-
atively impact on the achievement of the global climate targets (i.e. the
Paris Agreement aimed to keep the global temperature increase be-
low 2 degrees Celsius with respect to pre-industrial times) and the ob-
jectives of the EC Sustainable Finance Action Plan,7 aimed to align fi-
nance to sustainability. Achieving these objectives is also at the heart
of the 2019 EU Green Deal program.8 Fiscal measures that provide
tax reductions or exemptions to firms that either base their profits on
fossil fuels or carbon intensive activities (e.g. fossil fuels extraction,
traditional automotive), without any conditionality (e.g. on the decar-
bonization of their business), contribute to the misalignment of the
economies with respect to the climate targets and objectives of the
EU Green Deal programme. This, in turn, makes the risk of carbon
stranded assets9 more material. Indeed, as shown by Battiston et al.
(2017), investors’ portfolios are largely exposed to carbon stranded
assets and, more generally, to Climate Policy Relevant Sectors (CPRS
i.e. sectors of economic activity that are affected positively or nega-
tively by a late and sudden transition to a low-carbon economy).
CPRS represent also a large share of the ECB’s expansionary mon-
etary policy as already shown in the context of the ECB’s CSPP QE
(Battiston, Monasterolo 2019). There is a debate on whether the ECB
6 https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200312~45417d8643.
en.html.
7 https://ec.europa.eu/info/business-economy-euro/banking-and-finance/
sustainable-finance_en.
8 https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-
deal_en.
9 Stranded assets are assets subject to write-downs or devaluations caused by new
climate policies (see van der Ploeg, Rezai 2020).

should signal the importance of decarbonizing portfolios to support

the EU Green Deal programme. This would contribute to rewarding
the firms that demonstrates progress in the low-carbon transition rel-
ative to their own sector of economic activity, rather than only penal-
ising all carbon intensive firms.
The misalignment of asset purchases contributes to (i) widen the
gap between the COVID-19 recovery and the governments’ climate
pledges (e.g. the Paris Agreement and the Green Deal programme
in the EU), (ii) foster the realisation of carbon stranded assets in the
economy, (iii) reverse years of ‘signalling’ by central banks and fi-
nancial regulators engaged in supporting climate related financial
disclosure, e.g. within the premises of the Network for Greening the
Financial System (NGFS) (NGFS 2019). Further, by reducing cap-
ital requirements for credit institutions, and by revising the Non-
Performing Loans regulation, without conditioning these measures
to countercyclical capital accumulation and to the decarbonization
of their balance sheets, the recovery measures counteract the reg-
ulatory efforts introduced after the 2008 financial crisis aimed to
strengthen financial stability.
4 COVID-19 Recovery and Climate Mitigation:

A Role for Policy Complementarity?
An approach to operationalize EU solidarity in response to the

COVID-19 crisis, while exploiting ways to address the impending
climate crisis, has been proposed by Monasterolo and Volz (2020).
For EU member states with low fiscal space and high debt, financ-
ing the COVID-19 response is perceived to have higher priority than
the EU’s climate targets. The proposal foresees the coordinated issu-
ance of COVID-related bonds by the EC as well as Green Deal bonds
by the EIB. The EC issues COVID crisis-conditioned bonds, avail-
able for purchase by private and public investors. The bonds pro-
ceeds are to be used exclusively for funding an immediate response
across the Union to alleviate the socio-economic impact of the pan-
demic. At the same time, the EIB issues new Green Deal bonds that
support projects in the COVID-19 recovery phase via structural in-
vestments aligned with the Green Deal carbon neutrality targets.
The Green Deal bonds could be used to finance both climate-aligned
private investments as well as strategic pan-EU infrastructure in-
vestment, at low cost, to support the recovery phase in all member
countries. The proposal by Monasterolo and Volz has three interest-
ing features. First, it provides a ‘common debt instrument’ that does
not generate a moral hazard by individual member countries (since
it is conditional to the COVID-19 response). Second, it would avoid
compromises between using scarce national finances for either the
COVID-19 response measures or Green Deal investments. This would

ease the public debt burden of member states, thus preserving finan-
cial stability at the individual country and Eurozone level. Third, it
would foster a deeper integration of EU institutions and coherence of
EU funding programmes with the Green Deal objectives. This would
open the way to a responsible shared management of these funding
programmes and objectives among member states and generations.
Deepening fiscal inequality: why it matters for public debt
sustainability. An important debate is emerging about the relation
between taxation policies and the economic recovery. Many firms
that are benefitting from fiscal measures introduced in EU countries
belong to holdings or groups which have fiscal residency in countries
with very low effective tax rates (such as The Netherlands, Luxem-
bourg, Ireland or Switzerland).10 Using a wide range of legal strate-
gies, multinational enterprises are able to shift profits from the coun-
try where the revenues are generated to a country with a very low
effective tax rate. The problem is well-known and long standing. In
the aftermath of the 2009 financial crisis, because of the strain on
public finances, an OECD/G20 project called “Base Erosion and Prof-
it Shifting” (BEPS)11 was created. “Multinational enterprises exploit
gaps and mismatches in the international tax rules to artificially shift
profits to low or no tax jurisdictions and avoid paying their fair share
of tax”.12 When these strategies are legal, the practice goes under
the name of tax avoidance. The 2016 Panama Papers scandals led to
renewed efforts in the EU on combating tax avoidance. Remarkably,
the Public-Country-by-Country Reporting (CBCR) directive was re-
jected by the EU Council thanks to the vote of the member states
with low taxation regimes. The directive would have mandated mul-
tinational companies to disclose key fiscal financial information of
their subsidiaries by country (Garicano 2019).
In the context of the COVID-19 recovery, there is a concern that
firms benefitting from public aid in a country in which they generate
revenues will avoid taxation by shifting elsewhere their profits. The
phenomenon results in an unintended cross-border subsidy and con-
tributes to increasing the inequality between countries. In the EU,
this phenomenon is particularly relevant because it works against
the EU Cohesion Policy, which represents now the largest item on
the EU budget. The aim of the EU Cohesion policy is to narrow the
inequality gap by fostering the economic convergence of EU regions.
It is important to notice that all EU countries, including those with
10 For a review of the top ten tax haven see e.g. Zuckman, Wright 2018.
11 https://www.oecd.org/about/impact/combatinginternationaltaxavoid-
ance.htm.
12 Cf. footnote 9.

low taxation, benefit from the EU Cohesion Policy. Conversely, even

countries that are damaged by this fiscal dumping (e.g. Italy) large-
ly contribute to the funds of the EU Cohesion policy. There is thus a
double negative distributive effect.
5 Doing More and Better Does not Cost More:

Policy Complementarity is a Matter
of Understanding and Management
As we have discussed above, the fiscal and monetary policies intro-

duced so far in the EU countries promote a ‘business as usual’ eco-
nomic recovery. This is a short-term strategy that may jeopardise the
mid-to-long-term environmental sustainability and financial stability
objectives. In particular, the fiscal measures introduced so far ham-
per the climate policy measures and halt the already difficult progress
on tax transparency. Indeed, the problem of reconciling taxation fair-
ness, efforts to restart the economy and climate change have been
recently explicitly discussed by the EU Commissioner for Economy.13
Perhaps, the most important thing to realise is that a short-term
approach to the COVID-19 response that does not consider the cli-
mate and the taxation issues are more costly and less effective than
tackling these issues together. Indeed, we can choose between fi-
nancing now a carbon intensive economic recovery (i.e. supporting
firms unconditionally to their decarbonization efforts) and later a
low-carbon transition (thus paying twice), or to finance right away a
green economic recovery (thus paying only once), exploiting creative
destruction in the Schumpeterian sense. Similarly, governments can
choose to give state aid to firms that engage in tax avoidance strat-
egies. In this case, they will face the continued reduced income tax
resulting from profit shifting (thus paying twice). Alternatively, they
can choose to resolve this taxation policy issue right away and reduce
tax income losses in the future (thus paying only once).
To conclude, strengthening the socio-economic resilience against
future pandemics, as well as other future shocks, calls for recovery
measures that are fully aligned to the objectives of the EU Green
Deal and of the EU corporate taxation policy. Tackling these objec-
tives together is more cost effective than addressing the COVID-19
crisis with short-term measures. Remarkably, because of the inter-
connectedness between climate risk, pandemic risk and financial risk
(Monasterolo, Billio, Battiston 2020), this may be actually the only
feasible way to build resilience to future crises.
13 https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_20_398.

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Avoiding a Great Depression

in the Era of Climate Change
Nicholas Bardsley
University of Reading, UK
Abstract If loan issue falls faster than repayments, money becomes increasingly
scarce, leading to deflationary pressures and unemployment. Central banks have re-
sponded by ‘quantitative easing’, a regressive form of money printing which buys off the
national debt. Such credit could instead finance green infrastructure, health and social
care, a basic income, and debt relief. Fiscal policy expansion which is not monetised,
in contrast, results in crowding out. Given the ecological crisis caused by greenhouse
emissions, the aim ought not to be resumption of business as usual. A social-ecologi-
cal response to the crisis would deploy a mixture of public credit creation deployed in
prioritised sectors, progressive taxation, and direct curbs on greenhouse emissions.
Keywords Great Depression. Climate change. Unemployment. Central Bank. Quan-

titative Easing. Fiscal policy.
Summary 1 Introduction. – 2 Why Fiscal Stimulus cannot be Financed by Bond

Issues. – 3 Why Debt Monetisation Should not be Done by QE. – 4 Why We Do not Simply
Need ‘Recovery’ of the Previous Economy. – 5 A Post-COVID Social Ecological Policy
Package. – 6 Conclusions.
1 Introduction
If one asks the general public who creates the money supply, the majority re-
sponse is invariably the government, via the central bank. This is emphat-
ically not the central bank’s understanding, however. As Sir Mervyn King
said in 2012, then governor of the Bank of England (hereafter “The Bank”):

ISBN [ebook] 978-88-6969-442-4
DOI 10.30687/978-88-6969-442-4/020
Nicholas Bardsley
When banks extend loans to their customers, they create money

by crediting their customers’ accounts […] a damaged banking sys-
tem means that today’s banks are not creating enough money. We
have to do it for them. […] Insufficient money creation can lead to
a contraction of the money supply and a depression.1
The governor was talking in the aftermath of the 2008 global finan-
cial crisis, and referring to Quantitative Easing (QE), rather than
printing notes and coin. In fact, only 3% of the UK money supply is
created as notes and coin in circulation in the modern era, and 97%
is virtual credit, ordinarily supplied as private bank loans. The cri-
sis in the wake of COVID-19 is estimated to be greater than that of
2008, with severe and immediate impact on jobs and GDP.
Whilst much media attention has been focused on the ability of
firms and households to service their debts, less attention has been
paid to the flow and composition of new loans. The balance between
new loans and repayments determines how much money is circulating
in the economy. If new lending dries up but the existing loans contin-
ue to be serviced, the means of payment present in the economy re-
duces, since the principal on the loans is destroyed when repaid, un-
der banking rules of account. This dynamic is believed to have been
responsible for the Great Depression of the 1930s. People found the
depression hard to understand, since the workers, machines and ma-
terials were all still perfectly functional. It was as if the ghost in the
machine had vanished. Nowadays, central banks are prepared to cre-
ate credit to compensate.
Credit markets have been strongly affected. UK households repaid
a record £7 billion (net) of bank loans in April, following £3.8 billion in
March with a further £4.6 billion in May, and real estate transactions,
which account for the bulk of UK credit, were just 10% of their pre-
COVID count in May (BE 2020). Anticipating contraction The Bank has
thus far increased its QE program by an enormous £300 billion at the
time of writing (July 2020), increasing the stock of government bonds it
holds to £745 billion, over 40% of the UK national debt. In the remain-
der of this article, I explain why such ‘money printing’ is the general
form that any net ‘stimulus’ activity has to take, rather than through
the government borrowing to spend. I then discuss implications of
prospective stimulus activity of the burgeoning climate emergency.
Public understanding of these matters remains weak, not helped
by economics texts portraying banks as ‘intermediaries’ passing
money between lenders and borrowers, rather than creating credit.
For example, see Williams and Turton (2014, ch. 5), who also state
1 Speech to South Wales Chamber of Commerce, The Millenium Centre, Cardiff, Oc-
tober 23, 2012.

Nicholas Bardsley
that QE does not create money. The authors contradict themselves

by saying that QE has maintained M4, the broad measure of money
supply, when bank lending fell after 2008. The QE part of this con-
tradiction can be resolved if the government pays off the bonds and
The Bank retires the funds received. It seems unlikely that this will
actually happen however. In the meantime, QE is clearly expanding
the money supply.
2 Why Fiscal Stimulus Cannot be Financed by Bond Issues
Many commentators apparently believe that government deficits

must be financed by selling bonds, and that therefore if the gov-
ernment wants to stimulate the economy by spending more, it must
sell more bonds. This overlooks the fact that bonds are purchased
using existing money, not new credit. Thus, every pound that goes
towards purchasing bonds is a pound that is not being invested
elsewhere. Necessarily, no new purchasing power is created, and
therefore additional bond issues do not counteract monetary con-
traction taking place through falling bank loan volume. This is the
lesson of Japan’s apparent failure to use fiscal policy to boost output
following the collapse of its land value bubble in the 1990s. These
points are argued convincingly, both theoretically and empirical-
ly, by Werner (2005).
For example, the UK’s “Green New Deal” group argued for a pack-
age including green infrastructure spending financed by bond is-
sues, repeating their call in the wake of COVID-19 (GNDG 2008). The
TUC amongst others have also called for government spending to in-
crease “given the low cost of borrowing”, seemingly unaware of any
crowding-out problem. A common argument is that only government
spending can stimulate demand in a recession, as monetary policy
to expand bank lending is ‘pushing on a string’. It remains the case,
however, that new government bonds are not bought with new bank
credit. So to the extent that fiscal deficits are financed by bond issues,
government borrowing competes for existing (and declining) liquid
funds in the hands of pension funds and other investors.
The upshot is clearly that fiscal and monetary policy are not, con-
trary to what central bankers routinely profess, independent. The
viewpoint typical of financial sector actors, including ratings agen-
cies, that governments should not print money to finance expendi-
tures (‘monetise the deficit’) arguably aligns with the interests of
the financial sector to control the supply of money and debt. This in-
terest has recently crystallised into arrangements such as central
bank independence and diplomatic agreements such as that in the
Maastricht Treaty not to monetise deficits. This situation may help
explain why convoluted procedures such as QE are devised to do so
Nicholas Bardsley
when necessary. Central bank independence is itself dubious howev-

er, when the government appoints the governor and can veto its key
decisions, as under the Bank of England Act 1998.2
3 Why Debt Monetisation Should not be Done by QE
QE involves the central bank buying government bonds and other as-
sets including company bonds, on the ‘secondary’ market, meaning
bonds that have been auctioned by the government previously. For ex-
ample, it involves buying gilts3 held by pension funds, with the latter
receiving deposits in their bank accounts in return. Since The Bank
is publicly owned, this means the public sector is effectively print-
ing money to buy back its debt (‘debt monetisation’).
The problems with QE include firstly that it is regressive; because
it raises asset prices it benefits owners of bonds and shares, who tend
to be well off. Persons with property also benefit through lower inter-
est payments on mortgages, and the effects of this on land values as
reflected in house prices. The Bank itself reported that the top 5%
of households by financial assets held 40% of them, with most house-
holds owning little or none. Asset-holding households gained an es-
timated £600 billion from £325 billion of purchases in the first wave
of QE (BE 2012). Secondly, QE is strategically blind, since there is
no control over where the money that is printed ultimately ends up.
Those selling their bonds might use the money to buy more bonds,
shares, land, property or related financial products. Mostly these
will be trades in existing assets, not generating new goods or ser-
vices. A third problem is that low interest rates, though they lower
debt service costs, discourage bank lending by making it less profit-
able. Finally, there are adverse effects on pension funds, motivating
the abandonment of defined benefit pensions, undermining people’s
financial security in retirement.
Given its demonstrable ills, QE should not be continued if there
are viable alternative forms of monetising deficits. There are at least
three. One is that The Bank simply credits government accounts as
necessary. Equivalently, the treasury may order The Bank to credit
non-government accounts as appropriate for its purchases. Alterna-
tively, The Bank can buy government bonds with new credit. Finally,
the government could make loan contracts with banks to finance its
deficits. These would result in fresh credit being issued, unlike sales
2 See in particular the extensive “reserve powers” of the Government under the
section 19 of the Act: http://www.legislation.gov.uk/ukpga/1998/11/section/19.
3 Gilts (gilt-edged securities) are UK government liabilities offering investors regu-
lar payments before maturity. See DMO (nd).

Nicholas Bardsley
of bonds in the primary market. The contracts could be made non-

tradable to prevent them becoming, as bonds are, objects of specula-
tion (Werner 2014). It is worth noting in passing that as an issuer of
the currency via The Bank, the government cannot be in a position
not to pay debts denominated in sterling. It is therefore strange to
suggest, as the current governor of The Bank has,4 that the govern-
ment might somehow run out of cash. The usual objection to monetis-
ing a deficit is that it is inflationary. This apparently applies in full to
QE, however, so is out of place in a discussion of alternative methods.
Perhaps one reason that The Bank has not pursued open debt
monetisation is that it is against the terms of the Maastricht Trea-
ty, the economic cornerstone of the EU project. Should it continue
to be politically necessary to avoid open monetisation by The Bank,
it is not clear why the option outlined by Werner (2014) would be ob-
jectionable.
4 Why We Do not Simply Need ‘Recovery’

of the Previous Economy
In the aftermath of the 2008 financial crisis, environmentalists were

hoping to see reduced greenhouse gas (GHG) emissions. They were
severely disappointed. Carbon emissions fell only for one year before
continuing a relentless upward trajectory (Peters et al. 2019), with
policy-makers’ attention fixated on the economy.
Similarly, many progressive commentators have been speculating
that a different economy might emerge after COVID-19 lockdown.
We have to realise that economic ‘recovery’ conceived only in terms
of stimulus instruments (the budgetary measures we have been dis-
cussing) means increasing greenhouse emissions again. It was no
accident they grew alongside GDP. This is because there is limited
substitutability of fossil fuel energy for renewables, given the much
higher “power density” of the former (Giampietro, Mayumi 2010).
That is, to achieve the same power output to the rest of society, re-
newable energy infrastructure uses far more land and labour, mak-
ing fossil fuel use inevitable for most industrial applications. Whilst
it seems possible, then, to reactivate the economy by monetised gov-
ernment spending without any structural planning, this is not what
should happen given the imperative to reduce global GHG emissions.
Le Quéré et al. (2020) estimate that following the large fall in
economic activity by April when economic activity was largely con-
4 Interview with The World Tomorrow, Sky News, June 22 2020. https://news.sky.
com/story/coronavirus-governor-says-bank-of-england-saved-britain-from-
effective-insolvency-12012369.

Nicholas Bardsley
fined to essentials, if economies operated at their previous intensity

by mid-June, there would be a 4% annual reduction in GHGs. There
would be a 7% fall if certain restrictions remained until the end of
the year, comparable to what would be needed to meet the aims of
the UN Paris Agreement on climate change.
In the medium term, energy supply constraints following ‘peak
oil’ reinforce these considerations. Conventional crude oil, which has
more favourable energetic properties than unconventional hydrocar-
bons, has been static since around 2006 (Bentley, Mushalik, Wang
2020), suggesting an imminent decline. To simply ‘restart’ the econo-
my and recover its previous intensity would, it seems, squander much
of the remaining higher quality energy resources on inessential con-
sumption.
5 A Post-COVID Social Ecological Policy Package
There is limited space here to expound an appropriate response to

the ecological crisis. Bardsley (2012) proposed a policy package in
detail which I now summarise. To prevent a repeat of the 2009 expe-
rience, fossil fuel use needs to be constrained. This could be imposed
by capping quantities of coal, oil and gas upstream, that is, requir-
ing fossil fuel companies to purchase emissions permits covering the
carbon content of any fuel they sell. An equitable way of doing this
is for the emissions rights (permits) to be allocated to the popula-
tion, either individually (a policy proposal named ‘cap and share’) or
in trust (‘cap and dividend’), so that when permits are sold the pop-
ulation acquires the revenue. This would compensate them finan-
cially for price increases deriving from energy scarcity, and house-
holds with the lowest emissions would benefit the most. See Comhar
(2008) for an evaluation applying the E3ME model of Barker (1999),
plus Kunkel and Kammen (2011) and Bardsley, Schnepf and Buechs
(2017) for illustration of redistributive effects of the policy applied
to specific sectors.
Green spending is necessary, financed directly by the central bank
or with loan contracts with private banks, and has potential to pro-
vide many jobs. This should include extensive thermal insulation up-
grades both for commercial and residential property, in addition to
development of renewable energy infrastructure. Agroecological and
other land management schemes should be developed and deployed
to combine enhanced carbon storage in soils and biomass with im-
proved food security. Biochar techniques for example appear prom-
ising, if complex.
In a future defined increasingly by resource and ecological limits
to growth, extreme inequality will become increasingly abhorrent as
the position of the worst off becomes more precarious. A substantial
Nicholas Bardsley
land (site) value tax would be a powerful tool for redistribution, and
would also help to reduce burgeoning housing costs by eroding specu-
lative gains from landholdings. A shift of the revenue base away from
taxes on labour and capital also makes sense to encourage produc-
tive activity, and this would not exacerbate GHG emissions given an
overall cap. Spending on public health and social care systems, which
should be more resource efficient and equitable than private sector
counterparts because of the sharing of resources across the popula-
tion, will also serve to alleviate inequality. Efficiency should not be
over-emphasised however, as having excess capacity has proved cru-
cial to the ability of health systems to respond to the crisis.
Debt relief should be introduced if household mortgage debts
prove intolerable. This would be problematic if it were to reward ir-
responsible borrowing, however. A solution could be for each house-
hold to receive vouchers which can be exchanged for debt, with the
loan issuer exchanging the voucher for central bank money, allevi-
ating bank losses. If the household does not have debt the voucher
could instead be exchanged for domestic thermal upgrades or re-
newable energy bonds. Since this relief scheme would benefit the
banks this measure should be conditional, for example on reintro-
duction of credit controls to give government more power to direct
economic activity.
A universal basic income could be partly constituted by the debt
relief and carbon revenue elements of the package but could be sup-
plemented as necessary with government spending. This concept
could be extended to one of universal basic services encompassing
minimum standards of energy and food provision.5
It must be admitted that such a program seems very unlikely to
happen. However, given the alignment of the current economic sys-
tem towards ecologically disastrous outcomes, a package that would
actually operate in the other direction must inevitably be radical.
The objective should be to find the least improbable set of measures
that would work to constrain and reduce emissions, whilst maintain-
ing welfare in an increasingly resource-constrained world. Compare
it to the UK government’s actual response: massive money printing
for QE, loan schemes for business, including loans to big business un-
derwritten by the treasury with few conditions attached, a small in-
crease in benefits, temporary income / employment support schemes
for those in work, grants for home insulation which benefit property
owners, some mortgage relief but no rent relief except for business.
There are to be no new controls on GHG emissions. Further infra-
structure spending has been announced but it is not yet clear if this
5 I owe this observation to Brian Davey (personal correspondence).

Nicholas Bardsley
adds to pre-COVID manifesto commitments.6 The regressive nature of

QE deserves repeating. BE (2012) estimated that the first wave of QE
gave an average transfer of £10,000 per UK household but reaped on-
ly by the richest 50%. It seems the UK is largely helping the better off.
Perhaps the main problem with the package proposed is the dif-
ficulty of implementing hard controls on fossil fuel use unilaterally.
It might be possible to devise a way of doing this via carbon tariffs.
But it would be difficult to drive emissions down year on year, as Le
Quéré et al. (2020), along with the mainstream of climate scientists,
deem necessary, without international cooperation.
6 Conclusions
Printing money to buy back bonds (QE) is regressive and strategical-

ly blind. A social ecological stimulus would, in contrast, openly mone-
tise the Public Sector Borrowing Requirement without raising asset
prices, and strategically direct credit towards green infrastructure,
agroecology, and essential goods and services, including health and
social care. Curbing greenhouse emissions is however, inconsistent
with maintaining current levels of consumerism, so the overall aim
should not be a general upturn in output. The economic response
to COVID should rather take place within a framework of hard con-
straints on greenhouse gas emissions. Suitable policies exist, but
plausibly require international cooperation to be implemented. In
the absence of such a framework, government spending packages
should be targeted, at provision of essential goods and services on a
universal basis, development of post-fossil-fuel infrastructure, envi-
ronmental and agroecological schemes.
6 An overview of government-funded schemes responding to the COVID crisis is giv-

en by Deloitte (2020). The overall stimulus effect depends how they are financed, which
is not outlined in the document.

Nicholas Bardsley
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lin: FEASTA, ch. 4.
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for Students and Practitioners. Chichester: John Wiley and Sons.

Part 9
Labour Market
279
COVID-19 Pandemic and Gender

Inequality in the Labour Market
in the UK
Giovanni Razzu
Abstract Although the movement towards gender equality in the labour market has
slowed in recent decades, a long-term view over the 20th century shows the significant
narrowing of the gender employment gap in the UK, a result of the increases in women’s
labour force participation and employment combined with falling attachment to the
labour force among men. It is too early to assess with precision the extent to which these
patterns will be affected by the COVID-19 pandemic but emerging evidence and informed
speculation do suggest that there will be important distributional consequences. Various
studies, produced at an unprecedented rate, are pointing out that the effects of COVID-19
are not felt equally across the population; on the contrary labour market inequalities
appear to be growing in some dimensions and there are reasons to believe that they will
grow more substantially in the medium term.
Keywords Gender. Labour market. COVID-19. Home production. Childcare. Employ-

ment. Pay.
Summary 1 Introduction. – 2 Context and Policy Background. – 3 The Economic

Shocks. – 4 Labour Market Impacts. – 5 Home Production Impacts. – 6 Concluding
Remarks.
1 Introduction
This chapter aims to assess the existing evidence on the extent to which the
COVID-19 pandemic has affected the relative labour market prospects and out-
comes of women and men in the UK. We will first introduce the most relevant
aspects of the pandemic, underlying the nature and extent of the economic

ISBN [ebook] 978-88-6969-442-4
Open access 281
DOI 10.30687/978-88-6969-442-4/021
Giovanni Razzu
COVID-19 Pandemic and Gender Inequality in the Labour Market in the UK
shock. This will help us to focus on the impact of the shocks on labour
market outcomes, particularly jobs and pay. Given the well-established
relationship between the labour market and the division of domestic
and unpaid labour, and the clear connection between the latter and
the nature of the shock produced by the pandemic, we will also assess
the emerging evidence on the gender gaps in household production.
Before proceeding, however, a brief note on the evidence we are
able to rely on is needed. Official labour market statistics are derived
from the Labour Force Survey (LFS), the largest household survey in
the UK. Unfortunately, the LFS is not as timely as we would need in
these circumstances to assess the impact of the COVID-19 pandem-
ic on the labour market; the Office for National Statistics (ONS) is
therefore making great strides into producing real time labour mar-
ket data, which is still experimental and, more often than not, does
not report the information by gender. For this reason, we comple-
ment the data from the ONS with studies that have a specific gender
focus, carried out by other organisations and academics, often rely-
ing on surveys with much smaller sample sizes and not always rep-
resentative of the UK population. However, these are fundamental
to our understanding of the current impact of the pandemic and, al-
though not rich and comprehensive, they are nevertheless sufficient
to establish the key emerging patterns if not orders of magnitude.
2 Context and Policy Background
It was January 29, 2020 when the UK’s first two patients tested pos-
itive for COVID-19, after two Chinese nationals from the same fam-
ily staying at a hotel in York fell ill. More than a month later, on 5
March, the first victim in the UK was a woman in her 70s, at the Roy-
al Berkshire Hospital in Reading. It is on the 11th of March that the
World Health Organisation officially declares a pandemic and the UK
Government announces a £12 billion package of emergency support,
while, on March 17, the Chancellor announced a £330 billion pack-
age to help businesses furlough staff, saying that “the UK has never
in peacetime faced an emergency like this” and that he would aban-
don “orthodoxy” and “ideology” in response. It is on March 20 that
the Government ordered schools, nurseries and pubs to close and on
March 23 that the Prime Minister announces a national lockdown,
telling people that they may only leave home to exercise once a day,
to travel to and from work where absolutely necessary, to shop for
essential items and to fulfil any medical or care needs. These were
unprecedented measures that the Government introduced to contain
the spread of the coronavirus across the country. They have led to
businesses being shut down temporarily and extensive restrictions
on travel and mobility.
Giovanni Razzu
The two major fiscal measures adopted by the Government to pro-

tect employment have been the Coronavirus Job Retention Scheme
and the UK Self-employment Income Support Scheme. The former
originally allowed firms to furlough workers for up to three months
with the Government replacing 80% of employees’ wages, up to a
maximum of £2,500 per month plus the associated Employer Nation-
al Insurance contributions and pension contributions. This scheme
has now been extended until the end of October 2020 but the extent
of the wage replacement paid by the Government has been scaled
back. The UK Self-employment Income Support Scheme originally al-
lowed self-employed individuals to claim a taxable grant worth 80%
of their trading profits up to a cap of £7,500 in total for three months.
This has also been extended until the end of August but with a re-
duction in the extent of the Government’s contribution to 70% and a
cap of £6,570 in total.
3 The Economic Shocks
The economic effects of these measures combine aspects of so-called

supply and demand side shocks. The former are associated with re-
duction in the economy’s ability to produce goods and services and,
therefore, with shocks to the supply of labour. For instance, these
arise from mortality and morbidity due to the infection and, above
all, from the withdrawal of labour due to the social distancing meas-
ures put in place. The latter are associated with reduction in consum-
ers’ ability to purchases goods and services. For instance, consum-
ers are likely to both increase their demand for health services and,
seeking to reduce their risk of exposure to the virus, decrease the
demand for products and services that involve close contact with oth-
ers.1 The extent of the initial economic impact arising from the com-
bination of these shocks of course depends on the duration of the out-
break, the public health restrictions imposed to contain the spread
of the virus as well as other voluntary social distancing measures
that people take to reduce their chances of catching it. At the outset
of the lockdown policies in the UK, various estimates of the possible
impact ranged from a low of 15% to a maximum of 35% reduction in
Gross Domestic Product (GDP).2 The latest available official figures
1 In the early days of the outbreak, stockpiling behaviour also resulted in a direct de-
mand increase in the retail sector.
2 The Office for Budget Responsibility (OBR) estimated that GDP may fall by as much
as 35% in its “reference” scenario. The National Institute of Economic and Social Re-
search (NIESR) estimated that the fall could be between 15% and 25%, and the Or-
ganisation for Economic Co-operation and Development (OECD) estimates were at the
top end of this range.

Giovanni Razzu
by the ONS report that monthly GDP fell by 20.4% in April, the big-
gest monthly fall since the series began in 1997, more than three
times larger than the fall of the previous month and almost ten times
larger than the steepest pre-COVID-19 fall. In April the economy was
around 25% smaller than in February. Importantly, this affected the
whole of the economy, with particularly severe impact on manufac-
turing and construction. Other notable impacts have been on educa-
tion, which fell by 18.8% as a result of school closures; on food and
beverage service activities, which fell by 38.8% as a result of the clo-
sure of bars and restaurants and even on health, which fell by 11.4%
as a result of reduced activity in elective operations and fewer acci-
dent and emergency visits (ONS 2020a). The extent of this contrac-
tion in economic activity is really abnormal, thinking that, in April
2020, the decline in GDP has been three times greater than the fall
experienced during the Great Recession of 2008-09.3
The virus and the subsequent economic shocks we have outlined
above will have an impact on the world of work across key dimen-
sions: the quantity and quality of jobs and work, including employ-
ment and earnings. Importantly, emerging studies have shown that
this impact will not be homogeneously felt across the population but
will be more pronounced for specific groups who are more vulner-
able to adverse labour market outcomes than others. In the follow-
ing section, we assess this emerging evidence, starting with the em-
ployment outcomes.
4 Labour Market Impacts
Employment adjustment typically follows economic contraction with

some delay. In fact, the latest LFS estimates for the period Febru-
ary to April 2020 show that employment, unemployment and inac-
tivity remained mostly unaffected by the impact of the pandemic at
that point in time. In order to capture the extent of the impact of the
pandemic on the labour market, these more ‘traditional’ sources of
information have limitations. We would also need to look at other
information, such as real time information and the intensive mar-
gin and the number of hours of work. Indeed, Real time information
data from HM Revenue and Customs (HMRC) shows that the num-
ber of paid employees fell by 612,000 between March 2020 and May
2020 (ONS 2020b).
3 During the global financial crisis, from the peak in February 2008 to the lowest
point of March 2009, a total of 13 months, GDP contracted by 6.9%. Between March
2020 and April 2020, GDP has fallen by 20.4%, equivalent to a fall of approximately £30
billion in Gross Value Added.

Giovanni Razzu
The Institute for Fiscal Studies (IFS) have assessed the distribu-
tional impact of the recession caused by COVID-19. They report that,
on the eve of the crisis, around 15% of employees in the UK worked
in a sector that has largely or entirely shut down during the lock-
down. These include non-food retail, restaurants and hotels, passen-
ger transport, personal services and arts and leisure services. Wom-
en were about one third more likely to work in a sector that was shut
down than men: 17% of female employees were in such sectors, com-
pared to 13% of male employees (Joyce, Xu 2020). Claudia Hupkau
and Barbara Petrongolo (2020) assessed the proportion of working
men and women who work in critical sectors, defined according to
the UK Government’s guidelines on “critical workers” and “business-
es that must remain closed”, and in sectors that have been explicitly
locked down. They report that about 39% and 46% of working men
and women, respectively, are employed in critical sectors, while 13%
and 19%, respectively, are in locked-down sectors. This leaves 35%
of women and 48% of men relatively less affected in terms of employ-
ment and, therefore, earnings. However, an important characteristic
of a job is the percentage of tasks individuals can do from home, so
the likelihood of these men and women to avoid loss of employment
and earnings is linked to their ability to work from home. Adams-
Prassl et al. (2020) show that there is a clear relationship between
the percentage of tasks one can do from home and job loss and, in the
UK, this relationship has become even steeper as the crisis has un-
folded. They also confirm that the percentage of people having lost
their jobs varies substantially across the different occupations and
industries. We see that both in the US and the UK people working in
‘food preparation and serving’ and ‘personal care and service’ are
very likely to have lost their job due to the pandemic. On the other
side of the spectrum, people working in ‘computer and mathemati-
cal’ occupations or ‘architecture and engineering’ have been most
likely to keep their job. Hukpau and Petrongolo show that women
are more likely than men to be in jobs that can be done from home,
such as in education as opposed, for instance, to construction. De-
spite this possibly mitigating factor, in terms of gender equality, the
key point remains that because women disproportionately work in
retail and hospitality, COVID-19 is likely to have a bigger effect on
their employment and earnings. The study from Adams-Prassl et al
(2020), which collected two waves of data in the UK and the US from
almost 15,000 people, found that a total of 15% of the UK population
have lost their jobs due to the economic impact of coronavirus by
mid-April. Moreover, women are four percentage points more likely
to have lost their job than men in the UK, with 17% of women newly
unemployed compared to 13% of men.
The pandemic has also impacted on actual hours worked. Reasons
for changes to the intensive margin of employment are similar to those
Giovanni Razzu
mentioned above and include the level and distribution of aggregate

economic activity, changes in labour supply arising from health re-
strictions or other responsibilities such as child care. The survey from
Adams-Prassl et al (2020) reports a stark decline in the number of
hours worked, with the average change in hours worked (compared
to a typical week in February) being 7 hours in the UK. This is con-
firmed by official statistics from the ONS, which shows that, in the
period February to April 2020, the total actual weekly hours worked
in the UK decreased by 94.2 million compared to the same period in
2019, or 8.9%. The ‘accommodation and food service activities’ sector
saw the biggest fall in average actual hours: a decrease of 6.9 hours
to 21.2 hours per week (ONS 2020b). We have seen that women are
more likely than men to be employed in those activities.
The evidence on the impact of the recessions on the gender gap
in earnings is even more limited. The IFS estimates that the larg-
est distributional impact of the recessions associated with the pan-
demic is by earnings level: those with the lowest earnings are about
seven times as likely to work in shut-down sectors as those with the
highest earnings. 34% of employees in the bottom tenth of the earn-
ings distribution work in sectors directly affected by the lockdown,
compared to just 5% of those in the top tenth (Joyce, Xu 2020). Wom-
en are substantially overrepresented in the bottom of the earnings
distribution. A survey of more than 2,000 working age adults by the
national poverty charity Turn2us reports that women’s earnings are
expected to fall by £309 (26%) compared to an 18% drop (£247) in
earnings for men, resulting in a widening of the mean gender pay
gap of £62 a month (Turn2us 2020). A nationally representative sur-
vey found that 48% of mothers and 38% of fathers, compared with
27% of non-parents, are worried about making ends meet in the next
three months (WBG 2020)
One potential reason for these differences is given by the gender
gap in home production and women being more likely than men to
spend more time in unpaid activities, such as taking care of children
and homeschooling, the latter having been a direct consequence of
the school closures imposed by the Government to control the spread
of the virus.
5 Home Production Impacts
The impact of home production represents possibly the most signif-

icant difference between the economic recessions caused by the
COVID-19 pandemic and previous recessions, including the most se-
vere ones. This is because of the lockdown measures imposed by the
Government, which included the closures of schools from March 23,
2020. This difference is also likely to be the main reason as to why
Giovanni Razzu
the immediate, short-term gender impact of this recession is likely

to be different from those of previous recessions, which have typi-
cally affected men more than women.4
Despite the long-term trends towards increased marketization of
household production, whereby some of the unpaid activities usually
undertaken by women at home have been acquired in the marketplace,
gender gaps in the amount of time spent on unpaid tasks at home have
remained stubbornly high even before the lockdown put in place at the
end of March 2020. One study by the ONS estimated that women car-
ried out 60% more unpaid work than men (ONS 2016). The gender divi-
sion of household work depends on a series of factors, including house-
hold composition and number of children. In the UK, almost one-fifth
of households with dependent children are single mother households.
Some studies have assessed the impact of the lockdown measures on
the gender division of household work. One such study by Sevilla and
Smith (2020) reports that women have borne the majority of the ad-
ditional burden of childcare associated with the lockdown measures.
More specifically, they report a substantial burden of childcare for
families with young children, who are doing the equivalent of a work-
ing week of additional childcare, often on top of paid work. The fact
that women are less likely to be working than men cannot fully ac-
count for their greater burden of childcare. The amount of time wom-
en spend on childcare is much less sensitive to their employment than
it is for men. Women do a lot of childcare irrespective of whether they
are working or not, while men put in a lot more childcare when they
are not working compared to when they are. The longer term impact
of this, for instance on career progression, cannot be underestimat-
ed: mothers’ childcare comes more at the expense of their productiv-
ity and future career prospects than it does for fathers’. However, the
substantial increase in the need to take care of children and home
schooling when schools have been closed has resulted in a sizeable
increase in childcare done by fathers. Sevilla and Smith (2020) report
that fathers who are not working and, to a lesser extent, those who
were working from home, have substantially increased the number
of hours that they do and assumed an equal (or in some cases great-
er than equal) share of childcare. This has resulted in a slight reduc-
tion in the within-household gender gap from 30.6 percentage points
to 27.2 percentage points. The survey from Adams-Prassl et al (2020)
also reports that women spend a lot more time on childcare than men.
4 It is important here to emphasise that the finding on men being more affected by
recessions than women refer to the short-term, immediate impact of recessions, typi-
cally associated with gender industry segregation. When a fuller account of industry
and occupational segregation is taken, as well as other factors, such as fiscal austeri-
ty measures in the last great recession, women’s employment is not less affected than
men’s (see Razzu, Singleton 2018).

Giovanni Razzu
COVID-19 is a public health crisis with huge economic and social con-
sequences. Emerging evidence shows that the economic and social
impacts are not felt evenly across the population.
Two aspects of the crisis have contributed to making its econom-
ic impact peculiar and possibly more severe than previous crisis: the
combination of demand and supply side shocks and the nature of the
government intervention in terms of lockdown measures and direct
closure of economic activities to control the spread of the virus. The
latest available data on output shows that GDP contracted by more
than 20% in the month of April. Although this will show later on in
statistics on employment and participation, real time experimental
data indicate a substantial reduction in the number of paid employ-
ees between March and May 2020 and in the hours of work. This im-
pact has been felt across the economy but, given the nature of the
lockdown measures, it has affected some sectors more than others,
particularly retail, accommodation and food services sectors. Dis-
tributional analysis also shows that the impact is most salient at the
bottom of the earnings distribution than for high paid jobs. The fact
that women are more likely than men to be employed in those sec-
tors, and more likely than men to be at the bottom of the earning dis-
tribution, means that their labour market outcomes are more likely
to be negatively affected than men’s.
The nature of the lockdown measures, including the schools clo-
sure, has resulted in a substantial additional burden on child-caring.
The impact of this additional burden on gender equality depends on
various factors, including household composition, number of children
and employment status. The emerging evidence presents two find-
ings. On the one hand, in absolute terms, women have seen a sub-
stantial increase in the number of works devoted to household pro-
duction and childcare. They are also doing a lot more juggling of
childcare and work than men are. The impact this is likely to have on
women’s productivity and therefore their career progression could
be very substantial.
On the other hand, given that many men have had their working
hours reduced, being furloughed or having lost their jobs since lock-
down at the end of March, they have also substantially increased the
hours of childcare.
In order to address some of the more pronounced labour market
consequences of the crisis, the Government has intervened with two
main schemes, supporting the wages of employees and self-employed
who have been furloughed. To the extent to which women’s labour
market outcomes have been affected by the crisis more than men’s,
these schemes will benefit them relatively more. However, important
aspects of the crisis that possibly have significant impact on gender
Giovanni Razzu
equality in the medium term in the labour market have not received
necessary government attention. Women are over represented in sec-
tors that have been mostly affected by the lockdown, such as retail,
accommodation and food services sectors and it is not clear what
long-term impact the lockdown measures will have on the sustain-
ability of many businesses active in those sectors. The UK Govern-
ment has not yet announced a comprehensive post-COVID economic
recovery plan in this respect.
Regarding pay, the Government suspended the legal requirement
for all UK firms with more than 250 employees to publish measures
of the gender pay gap within their own organisations, which was due
annually at the beginning of April. This is unfortunate not just be-
cause the emerging evidence suggests the gender pay gap may have
increased as a result of the crisis but also because it gives a strong
message that gender equality in the labour market is not a priority
and can be sacrificed in certain circumstances. The crisis has also
started a new dialogue on health, key workers, social care and pay,
also epitomised by the Thursday night clapping across the nation. We
know these are areas where women’s contribution is overwhelming.
It would be another missed opportunity if concrete actions on pay
and support to these sectors did not follow.
Gender inequality in the labour market is the product of many fac-
tors: the issues are complex, manifold and interrelated. Most nota-
bly, they are often the result of a structured system of institutions
and norms in which gender plays a very important part. This is evi-
dent when looking at the role of social attitudes towards gender and
employment and the associated impact of motherhood on women’s la-
bour market prospects. The pandemic has clearly resulted in an ad-
ditional burden on childcare; its possible long-term consequences on
women’s work prospects would need to be addressed. Increasing the
amount of child benefit, as proposed by various organisations and ac-
ademics earlier on in the crisis, is one possible intervention but more
can be done to raise awareness and provide practical tools to fam-
ilies on how the distribution of work within the household could be
more gender equal, now that many fathers are likely to be at home
and are sharing more of the burden than they used to do. Building on
this to ensure it becomes engrained would be important. Any discus-
sion, analysis and intervention related to new ways of working rep-
resent a great opportunity to address the systemic issue of the rela-
tionship between paid and unpaid work in the household.

Giovanni Razzu
Bibliography
Adams-Prassl, A.; Boneva, T.; Golin, M.; Rauh, C. (2020). “Inequality in the Im-
pact of the Coronavirus Shock: Evidence from Real Time Surveys”. IZA Work-
ing Paper No. 13183. https://bit.ly/32ARwHv.
Hupkau, C.; Petrongolo, B. (2020). “COVID-19 and Gender Gaps: Latest Ev-
idence and Lessons From the UK”. VoxEU.org, 22 April. https://bit.
ly/3fKbaVe.
Joyce, R.; Xu, X. (2020). “Sector Shutdowns During the Coronavirus Crisis: which
Workers are Most Exposed?”. The Institute for Fiscal Studies. https://
www.ifs.org.uk/publications/14791.
NIESR (National Institute of Economic and Social Research) (2020). “Monthly
GDP tracker”. https://www.niesr.ac.uk/latest-gdp-tracker.
OECD (Organisation for Economic Co-operation and Development) (2020).
“Evaluating the Initial Impact of COVID-19 Containment Measures on Eco-
nomic Activity”. https://bit.ly/2ZIkIKX.
OBR (Office for Budget Responsibility) (2020). “Commentary on the OBR Coro-
navirus Reference Scenario”. https://obr.uk/coronavirus-analysis/.
ONS (Office for National Statistics) (2016). “Women Shoulder the Responsibil-
ity of Unpaid Work”. https://bit.ly/2OE4RXx.
ONS (2020a). “GDP Monthly Estimate, UK: April 2020”. https://bit.ly/30x4OC6.
ONS (2020b). “Labour Market Overview, UK: June 2020”. https://bit.
ly/2OJqANA.
Razzu, G.; Singleton, C. (2018). “Segregation and Gender Gaps in the United
Kingdom’s Great Recession and Recovery”. Feminist Economics, 24(4), 31-
55. https://doi.org/10.1080/13545701.2018.1451907.
Sevilla, A.; Smith, S. (2020). “Childcare During a Global Pandemic: Many Wom-
en Left Juggling Work and Childcare, But Men Do their Share When They are
not Working”. VoxEU.org, 16 June. https://bit.ly/3jq4T38.
Turn2us (2020). “Coronavirus Pandemic Widens the Gender Pay Gap”. htt-
ps://bit.ly/3eKEMRb.
WBG (Women’s Budget Group) (2020). “Half of Parents with Young Children
‘Struggling to Make Ends Meet’”. https://bit.ly/32xizUe.

India’s Lockdown
and the Great Exodus
Some Observations
Arup Daripa
Birkbeck, University of London, UK
Abstract The pandemic-induced lockdown in India caused a great exodus of millions

of seasonal workers from cities, an impact for which the government was completely
unprepared. This essay considers the socio-economic setting of the exodus, the potential
economic and epidemiological impact, policy suggestions, and evaluation of the policy
(non)response of the Indian government. We consider the underlying political economy
of policy distortion and suggest ways that might enable incentive compatible corrections.
Keywords Internal migration. Lockdown. Informal economy. Public policy distortions.

Political economy of policymaking. Incentive compatibility.
Summary 1 Introduction. – 2 “Othering” and Distortion. – 3 Economic Impact.

– 4 Policy Proposals. – 5 The Policy Stance of the Government. – 6 Lockdown and
Inconsistent Government Policy. – 7 The Selectively Absent Leviathan. – 8 A Ray of Hope?
1 Introduction
The threat of COVID-19 assumed ominous proportions in India by mid-March

2020, and even the Government of India, which had so far made few attempts
to prepare for the looming crisis, could not brush it aside any longer. In an at-
tempt to contain the spread of the disease, the government announced a total
lockdown on March 24, 2020. The announcement came at 8 pm on March 23,
with lockdown in effect from midnight. As the incessant churn of life of a bil-
lion people across overcrowded metropolises and sprawling semi-urban con-
urbations of India came to a sudden halt, as transport stalled, shops put down

ISBN [ebook] 978-88-6969-442-4
Open access 291
DOI 10.30687/978-88-6969-442-4/022
Arup Daripa
India’s Lockdown and the Great Exodus: Some Observations
their shutters, public places fell silent, and a billion people huddled in-
doors, a surreal saga unfolded on television screens across the coun-
try. In several big cities, roads that were supposed to be empty were
in fact teeming with masses carrying children and bundled posses-
sions, waiting at bus and train stations, and, having given up hope of
finding transport, embarking on journeys of hundreds of kilometres
on foot. These are the seasonal workers of India – a labour force of
over 120 million villagers who travel in search of work to urban cen-
tres in the fallow seasons. They live in city slums and work mostly in
the informal sector in industries such as construction, garment mak-
ing and small manufacturing, or work as street vendors, rickshaw
pullers and domestic help. Once the lockdown was imposed, most
of these jobs vanished overnight. The employers themselves faced a
cash crunch and stopped paying casual workers. Having little access
to the public welfare system (a problem we will come back to later),
and in many cases evicted from tenements by landlords concerned
about the virus, the workers had little choice but to try to return to
their villages. In an article in the Financial Times, the writer and ac-
tivist Arundhati Roy writes movingly about their plight:
Many driven out by their employers and landlords, millions of im-

poverished, hungry, thirsty people, young and old, men, women,
children, sick people, blind people, disabled people, with nowhere
else to go, with no public transport in sight, began a long march
home to their villages. They walked for days, towards Badaun,
Agra, Azamgarh, Aligarh, Lucknow, Gorakhpur – hundreds of kil-
ometres away. Some died on the way. (Roy 2020)
The great exodus and its human cost raise several economic ques-
tions, to which we now turn. How might we think about the economic
impact of the exodus? Where in the economy would it show up? What
policies might ameliorate the human cost? What role has the govern-
ment played and what light does that shed on the nature of govern-
ment policy? If government policy is inadequate, what is the source
of the distortion? And, last but not the least, how should social insti-
tutions change to address any endemic government failure?
2 “Othering” and Distortion
But before we talk about such questions, an ontological issue deserves

our attention. The seasonal workers come to urban centres from vil-
lages across the country – and in most cases they travel across states1
1 India is a federal union of 28 states and 8 union territories.

Arup Daripa
to seek work. Crossing a state border by an Indian citizen should be

an unremarkable event, yet these workers are labelled migrants. In-
deed, even those who cross state lines to settle elsewhere, but remain
poor, are routinely referred to as migrants. This “othering” through
categorisation is unfortunate to say the least and reflects a public at-
titude that makes for institutional discrimination and insidious biases
in public policy. As we discuss economic aspects of the exodus below,
this socio-political background is worth keeping in mind. In seeking
policy solutions, we need to look for appropriate incentives within this
structure. As will become clear later, simply making policy proposals
assuming the utopia of a welfare-maximising policymaker is not very
useful in the current context.
3 Economic Impact
Returning to the questions we posed above, let us first try to deci-

pher the potential economic impact of the exodus. Here it is key to
gain an understanding of the setting within which the problem man-
ifests. The Indian economy is large, but mostly informal and most of
the over half-a-billion labour force is engaged in relatively unproduc-
tive employment. Indeed, this lack of productivity is a crucial rea-
son for the majority of the 1.3 billion population to remain so poor. A
staggering 90% of the employment is in the informal sector including
agriculture, and produces a little more than 50% of the GDP, leaving
the formal sector, with 10% of the labour force, to produce the oth-
er half. The productivity gap is obvious.
Even though many of the informal sector workers have basic bank
accounts, they lack access to credit or insurance, and are therefore
largely financially excluded. The Government of India spends rela-
tively little on health and education,2 and in the poorer areas peo-
ple largely rely on their social networks to provide some support. In
this backdrop of endemic poverty and low levels of infrastructure
provision, the remittances sent by the seasonal workers play an im-
portant role in supporting a large number of households.3 Removing
these remittances not only hurts the households concerned, but has a
multiplier effect on many others in the local economy. In the absence
of formal credit or insurance, social networks can take some of the
strain when only a few households receive a negative shock. But when
2 Health spending is 1.28% of GDP and education spending is 3.8%. To compare, Bra-
zil spends 9.2% of GDP on health and 6% on education. The UK spends 9.6% of GDP on
health and 5.5% on education.
3 See Deshingkar, Akter 2009 for a detailed description of the occupation structure
of migrants and their contribution to GDP.

Arup Daripa
whole local economies get a macro shock, the networks run out of ca-
pacity to cope. Poverty and deprivation rise. Many small business-
es go bust permanently. The result is a deep recession in these local
economies. And while the removal of the remittances will have an
impact on certain areas, it also serves as a weathervane, signalling
ill-winds of lockdown for the whole of the informal economy, where
many jobs will be lost permanently. This will eventually reduce over-
all GDP growth estimates. Indeed, the informal sector had already
suffered a setback in 2016 from the poorly conceived demonetisation
policy,4 which drained liquidity from an economic system entirely de-
pendent on cash transactions and had a large and long-term nega-
tive impact. Given the long duration of the lockdown,5 the total im-
pact on the informal economy is likely to be even greater this time.
The exodus has a negative impact also from an epidemiological
point of view. Large numbers travelling to remote locations carry the
risk of introducing COVID-19 to previously disease-free areas. These
are also precisely the areas without any public health infrastructure,
exacerbating the potential downside risk.
4 Policy Proposals
What policies might mitigate these problems? In an insightful and

wide-ranging work, Debraj Ray and S. Subramanian (2020) have writ-
ten about the impact of the lockdown. This includes a condensed anal-
ysis of policy suggestions made by a variety of commentators. Two
broad themes emerge from this. The first is an observation on mac-
roeconomic policy. Given that the contraction in economic activity is
driven by a pandemic, both demand and supply sides are hit, and nor-
mal channels of monetary policy do not work. On the other hand, fis-
cal policy stands a much better chance of being effective. If the gov-
ernment were to invest heavily on public infrastructure and create
a safe working environment through testing, distancing, and provi-
sion of proper equipment, that could indeed have a positive impact
on the economy, including the informal economy. Second, and more
relevant for our focus on seasonal workers, a consensus has emerged
on calling for direct transfers, perhaps the obvious policy in such
a crisis. In India, the main channel for transfers is the Public Dis-
4 See Kumar 2018 for a description of the impact of demonetisation on the informal
sector. See also Chodorow-Reich et al. 2018 for a theoretical and empirical analysis of
demonetisation in a macroeconomic model, which finds strong evidence of the effect of
money on output in India and shows why cash matters a great deal in India.
5 The lockdown started on March 24, 2020, and was extended in phases until May 30,
2020. Subsequently, some restrictions were lifted, but a lockdown continues in sever-
al areas that have been identified as COVID-19 hotspots.

Arup Daripa
tribution System (PDS). Access is through home-state issued ration

cards, so that out-of-state workers are excluded from PDS transfers.
Expanding the scope of transfers in a crisis requires relaxation of
such requirements. Many commentators, including the dream-team
of Amartya Sen, Raghuram Rajan and Abhijit Banerjee (2020), have
made the case for universal access to the PDS with minimal checks.
Writing in The Wire, Dipa Sinha (2020) discusses a specific policy
along these lines. She proposes that the government allocate 10 kg
of grains per head per month, and make the coverage universal, re-
quiring minimal documents simply to keep track of everyone. She es-
timates that if 20% of the population were to self-select out, the plan
would require 65 million tons of grains over 6 months. The govern-
ment of India has a large stockpile of 75 million tonnes of grains, with
another 30 million tonnes incoming soon, so that the plan is feasible.
In our view, apart from the virtue of being simple to implement, the
plan has exactly the right incentives. Given universal coverage, the
scope for capture by special interests or middlemen is low (and in any
case, a second-order concern in a crisis). Further, the long queues
that are bound to form to access the rations would serve as an en-
dogenous incentive for the better-off to stay away. The policy there-
fore targets the needy and goes a long way to solve the problems of
hunger and starvation.
5 The Policy Stance of the Government
Contrast the proposals with the actual schemes adopted by the gov-
ernment. The policy response has been surprising, mainly because
even the most obviously effective suggestions about greater transfers
with broader coverage and fewer checks seem to have fallen on deaf
ears. The government did announce certain relief measures includ-
ing transfers of 5 kg of grains per head per month through the PDS
list just after the lockdown started. However, as noted above, sea-
sonal migrants had no access to such transfers. Almost seven weeks
later the government announced further measures that expanded
coverage for two months to those without a ration card, but then re-
quired other documents to grant access. This pathological insistence
on identity checking for basic food transfers in a time of crisis – a
stance diametrically opposite to the proposals mentioned above – has
limited the effectiveness of the policy for migrant workers. A report
from the Stranded Workers Action Network (SWAN 2020) notes that
as late as early June, over nine weeks since the lockdown started,
80% of the seasonal migrants have not received any grains under
the scheme. A similar apathy characterised the response to millions
walking long distances. The government only arranged special trains
to carry workers home after six weeks had passed from the imposi-
Arup Daripa
tion of the lockdown. Indeed, the government’s overall response to

the economic crisis brought about by the lockdown amounts to spend-
ing only around 1% of GDP – meagre compared to 9% in the US, 7% in
Germany and 4.5% in the UK.6 And if we were to use a deflator tak-
ing the relative poverty indices into account, the comparative figure
would be much more unflattering.
6 Lockdown and Inconsistent Government Policy
The response raises a more fundamental policy question: is the lock-

down itself justified? Recall that starting March 24, the lockdown
went on till May 30, and as we write it continues in several areas with
only some rules relaxed. There is no question that the lockdown has
saved lives by halting the spread of the disease. In an ideal world,
the government would supplement the lockdown with appropriate-
ly scaled transfers to the poor. But given the actual policy response,
the lockdown has itself become an agent of death for the poorest and
the most vulnerable, who have little to fall back upon when their dai-
ly livelihoods vanish. We do not know precisely how many lives have
been saved by the lockdown, but one would hazard a guess that far
more lives have been destroyed by it given its prolonged duration.
Numbers aside, it is clear that if saving lives is the objective, the
lockdown and the subsequent policy response are not consistent with
each other. What explains the sub-optimal policy stance? To under-
stand how such distortions arise, we need to delve into the political
economy of policymaking in India.
7 The Selectively Absent Leviathan
In their recent intellectual tour de force, The Narrow Corridor, Daron

Acemoglu and James A. Robinson (2019) discuss the idea of liberty,
and how it requires both a strong state and a strong society. Liber-
ty, they argue, requires not being subject to the capricious will of an-
other. “It requires the capacity to stand eye to eye with your fellow
citizens, in a shared awareness that none of you has a power of arbi-
trary interference over another” (7). Starting from Thomas Hobbes’
idea of “Leviathan” as the solution to anarchy, and using examples
from history, they show that liberty can be violated both in the ab-
sence of a strong state (absent leviathan) and if a strong state were
to declare war on its own citizens (despotic leviathan). The plight of
6 See, for example, Jha 2020 and Sibal 2020. Ray and Subramanian 2020 contains a
detailed description of policies adopted.

Arup Daripa
the seasonal migrants in India clearly demonstrate an absence of lib-

erty. Yet, the Indian state power cannot be properly characterised as
either absent or despotic. For India, Acemoglu and Robinson point to
the caste system as a powerful cage of norms that fragment society
against itself. The consequent inability to monitor the state fuels the
absence of liberty even in a participatory democracy. We would ar-
gue that this is not the whole story. The plight of the seasonal work-
ers points to a further cause of loss of liberty in India. Even in the
absence of caste-based fragmentation, the poorest sections of the
society are too distracted by their daily struggle for survival to gel
as a unified front with ‘voice’. The absence of voice is complete: nei-
ther the state nor any structure in society including the press pay
them much attention. Thus, the leviathan can be selectively absent.
Let us give a further example to delineate a selectively absent le-
viathan. A second epidemic – deadlier than COVID-19 – rages in In-
dia at this very moment. An entrenched disease, it has been ravag-
ing sufferers for several years now. Yet, many Indians are unaware of
it, the press hardly reports on it, and the government devotes some,
but by no means sufficient resources to combat it effectively. This is
the epidemic of tuberculosis. The World Health Organization’s latest
report (WHO 2019) estimates that in 2018, 2.7 million Indians con-
tracted the disease, of which 450 thousand died. Absolute numbers as
well as the death rate (17%) far exceed that of COVID-19 so far. What
explains the institutional apathy towards the problem? The answer
is again linked to poverty. Indeed, tuberculosis is known as a dis-
ease of poverty, proliferating in densely inhabited areas such as ur-
ban slums. It is therefore the same absence of voice that distorts the
government’s response to the plight of the seasonal workers as well
as that of the victims of tuberculosis. Clearly, these groups would be
denied liberty even without a cage of norms.
8 A Ray of Hope?
Can we envisage a way out of the problem? The National Capital Ter-
ritory (NCT) of Delhi offers a promising case study. Delhi has a large
community of settled ‘migrants’. As we discussed before, these are
people originating from other states who settle in Delhi but remain
poor. Given our previous discussion, it does not come as a surprise
that they have historically lacked voice and suffered the absent levia-
than. However, with rising numbers, and with a growing recognition
that their votes should be cast in a way that brings benefit, their po-
sition has gradually changed. Around 2013, a regional political party
sensed an opportunity and started putting up members of the com-
munity as candidates in a significant number of seats. This helped the
migrants leapfrog into a voting bloc, now controlling between 30%
Arup Daripa
and 40% of the vote, and the party concerned has held sway in Delhi
NCT elections since. Indeed, across the political spectrum, anyone
in power seeking re-election can no longer ignore migrant welfare
issues. To employ another metaphor from Acemoglu and Robinson
(2019), by voting as a bloc on development, the settled migrants of
Delhi have finally had some success in chaining the leviathan.
For seasonal workers, two entitlements are critical. First, workers
who cross state lines should still have access to the Public Distribu-
tion System. The government is indeed implementing such a scheme
under the banner One Nation One Ration Card, which should be up
and running sometime this year. Second, as the Delhi case study
shows, to chain the leviathan successfully, the workers also need to
participate in India’s democracy as an effective bloc. Since voting
rights are tied to place of residence, the majority of seasonal work-
ers, working across state lines, are in effect disenfranchised. Even
though the group is large – they number somewhere between 120
and 150 million (the government does not have a separate database
for seasonal migrants) – their voice is thereby curtailed. Suggestions
have been made that they should be allowed postal votes or that in-
dividuals should be allowed to carry their vote, enabling exercise of
suffrage at the place of work. The government currently has no plans
to implement such policies. However, the great exodus has firmly im-
printed the worker underclass in the nation’s psyche. The political
scientist Pratap Bhanu Mehta (2020) writes eloquently about the jus-
tice that society owes them. Indeed, if their harrowing stories bring
about greater solidarity from social institutions, together they might
be able to gain the required rights, escape being subject to the ca-
pricious will of others, and have liberty at last. At least we hope so.

Arup Daripa
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Human Skills & the AI COVID

Challenge
Naeema Pasha
Abstract This chapter examines the impact of both the COVID-19 pandemic and AI on
the world of work. Both have created further uncertainty and ambiguity in the labour
market landscape. In dealing with high uncertainty, developing both organisational and
adaptability skillsets is critical to success, and a dynamic approach may be suitable to
enhance skill-building.
Keywords Pandemic. AI. Technology. Future of Work. Careers. Skills. Dynamic Ca-
pabilities.
Summary 1 Pandemic Economy and Work. – 2 History of Work, Careers and Skills. – 3 AI,
Came Slow –Then Suddenly. – 4 A Pandemic World of Work. – 5 Skills Building – Adapting
for Surviving and Thriving. – 6 What Does This Mean Next for Us?
1 Pandemic Economy and Work
From the industrial revolution to the present day, the global economy has ex-
panded – albeit with peaks and troughs interspersed throughout – and creat-
ed transformative innovations from the Ford motor car to the iPhone. Howev-
er, the troughs are what we humans feel the most. We are still reeling from
the last major recession in 2008, as global debt sharply increased, wages
remained low and productivity stagnated. Yet, the recession caused by the
coronavirus pandemic is different to previous downturns. This COVID-19 re-
cession was not caused by flaws in the global financial system like in 2008,
but instead it was the threat of illness and death on a global scale. The rapid
and unprecedented worldwide shutdown impacted every human on the plan-

ISBN [ebook] 978-88-6969-442-4
Open access 301
DOI 10.30687/978-88-6969-442-4/023
Naeema Pasha
et, with countless deaths, jobs lost, and livelihoods uprooted. How-
ever, the COVID-19 recession has also coincided with the increased
worldwide adoption of Artificial Intelligence (AI) and automation, a
process that has already streamlined work patterns.
The pandemic has also enabled faster adoption of digital technol-
ogy. In the familiar world of food retail, we’ve seen reduced human
interaction with consumers turning to online shopping, supermar-
ket scanners and even robot food deliveries.1 The pandemic has also
caused a shift in healthcare, from the use of robots, to GPs treating
patients via WhatsApp video. We have also witnessed the worldwide
shift of education from classroom to virtual learning which has al-
lowed – broadly speaking – teaching to continue. Organisations are
reconfiguring how ‘work’ can be done including balancing conflicting
ideas that it does not need to happen in offices, against knowing that
organisational culture is aided by face-to-face interactions. While we
applaud technology for keeping work going, it indicates that more AI
integration and automation will be adopted sooner and wider, carry-
ing clear implications for work and workers.
2 History of Work, Careers and Skills
Whilst we are seeing the transformation of work, the recent history

of work is worth reviewing. From the start to the middle of the last
century, in the age of mass manufacturing, workers were recruited
for similar skillsets to often work on identical jobs. Job roles were
consistent, often not changing in scope over many years (Parsons
1949). During this period, firms operated in hierarchies and man-
aged in tight boundaries. The watchword for this era was steady-
state. Later in the 20th Century, flexibility in work grew. Organisa-
tions moved towards a more customer-centric operation and as such,
systems were faster. Leaders were expected to head up workers with
a range of skills and knowledge, which could be applied and re-ap-
plied to different scenarios – and so boundaries between jobs, roles
and organisations blurred. The watchword thus became boundary-
less, coined by Arthur (1994, 295-306). The 21st century saw anoth-
er shift including upheavals bought by AI, and now COVID-19. Work
is more uncertain, but hyperconnected, hypercompetitive and in-
creasingly tech enabled. Companies and workers who display agility
in either adapting or taking advantage of digital technology gain suc-
cess. And so adaptability for this era is our watchword (LeBleu 2020).
1 “Robot Parcel Delivery Starts”. BBC News, 31 October 2018. https://www.bbc.com/

news/uk-england-beds-bucks-herts-46045365; “A New Kind Of Business”. Starship.
https://www.starship.xyz/business/.

Naeema Pasha
3 AI, Came Slow –Then Suddenly
Interest in AI is at all time high and has fuelled investment in AI tech-

nology. For example, the European Commission’s investment in AI has
skyrocketed – with a 70% increase from 2017 to 2020, coming to €1.5
billion. However, even this investment appears small in comparison to
the €12.1 billion investment in North America, and €6.5 billion in Asia
(European Commission 2020). But, while AI seems like a new phenom-
enon, it has existed for over 60 years. The term was coined by a group
of scientists who came together in 1956 to explore the deep potential
of computers. AI systems developed by early creators looked at mim-
icking human intelligences – but through a machine (hence the term
Artificial Intelligence). The following few years offered some exciting
innovations, but AI development slowed, and it really was not until the
start of the 21st century with the advent of immense computing pow-
er, and crucially, access to vast data, that AI really took off. Like some
statistical methodologies such as regression analysis, AI and Machine
Learning programmes could observe relationships, classifications and
predictions in data, but as AI programmes can work ‘unsupervised’
and on vast datasets with many variables, the results were unparal-
leled. As a result, AI innovations have influenced our work and life-
styles, from Facial AI assessing our personality in recruitment, to Con-
versational AI in our voice assistants such as Alexa who we freely talk
to at home but will soon join us in the workplace.
Modern iterations of AI do not need to use the old model of cop-
ying humans. Instead, machine learning algorithms learn in an al-
together different way to us humans. Some AIs can bypass human
skills, for example, a system developed by Google Health was able
to find cancerous cells in mammograms more accurately than the
radiologists it was tested against. In fact, the system detected 90%
of cancerous cells compared to 78% by radiologists. AI systems like
this can help speed up diagnosis and allow for treatment to start
faster (McKinney et al. 2020, 89-94). A question arising from this is
the role of doctors. Some suggest that the patient relationship part
of a doctor’s role is to be amplified – as the machine is giving better
data and at a faster rate to patients. But this process raises ques-
tions about all our jobs. In the next ten years, we can expect great-
er AI job integration. Take accountancy, the role of Financial AI will
do all the back-breaking work of analysing numbers, and by using
Machine Learning with sophisticated Data Science, it will sync with
consumer data and predict trends faster. What then does this leave
the accountants to do? Possibly do more human tasks such as build-
ing customer relationship. However, will companies need many ac-
countants? (World Economic Forum 2916). ‘Automation’ technology
underpins many of the predictions of jobs disappearing (ONS 2019),
specifically tech such as Robotic Process Automation (RPAs), where
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‘RPAs’ will whizz round a system of routine processes and complete

tasks that take humans days and weeks to do in days and minutes.
And the RPA will complete with fewer inaccuracies.
Although there is no argument that the adoption of AI technologies
will create new jobs, it does raise the issue of automation of current
jobs and the potential negative impact upon society. In 2017, the Of-
fice for National Statistics analysed the jobs of 20 million people in
England (ONS 2019) and concluded that 7.4% are at high risk of being
automated. In addition, it highlighted that women, part-time work-
ers and younger people in elementary occupations are most likely to
be affected – many doing the jobs RPAs are primed for. A Universal
Basic Income (UBI) has been put forward as one possible solution to
the loss of jobs and the impact of automation upon the working pop-
ulation. It is claimed that a UBI would allow some security to work-
ers, would contribute to limiting involuntary debt, and lower stress
levels. However, the UBI does equate ‘work’ to ‘money’ in its sim-
plest terms, negating the social aspects of work including person-
al value, relationships, a source of self-esteem, citizenship, and role
in society (Meyer 2019). It may also increase inequality. UBI, whilst
useful, could render the unemployed ‘the left behind‘, creating a so-
cial underclass.
4 A Pandemic World of Work
The pandemic has made us re-think our work – and many jobs might
be done with a mix of home and office work. For those employers look-
ing to keep the traditional office space many will look for technology
solutions to minimise spread of disease, such as:
• track and trace software to see who might be sick;
• Wristband sensors to alert workers if they cross set boundaries;
• sensor tracking of small changes in body temperature or voice
signatures to see who is ill;
• facial recognition software used to open doors reducing the
need to touch surfaces;
• robots emitting UV light to kill viruses.
Ahead of us further technological advances are likely to enable fur-

ther changes to work. For example, the development of 5G is expected
to have an enormous impact on businesses – especially so for a post-
pandemic economy as it will enable extraordinarily fast networking
and connectivity. Workers wanting to maintain a home-based work
lifestyle could use Virtual and Mixed Reality devices like Microsoft’s
HoloLens that would add imaging in video conferencing. 5G will en-
able faster and clearer connection, creating a far more personal ex-
perience. 5G, coupled with growth of AI will fuel development of the
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Internet of Things (IoT) which is expected stimulate the growth of

Smart Cities, Smart Healthcare and Smart Work. Current planning
on 5G + IoT adoption is intended to reach more deprived areas and
reduce digital differences in access – with many health commenta-
tors believing it could even reduce health inequality and even man-
age pandemic outbreaks better.2 The transformative potential of 5G
cannot be underestimated.
By 2025, IDC [2018] estimates that around 1.5 billion 5G connect-

ed devices will produce more than 175 zettabytes of data each
year. A zettabyte is the equivalent of one trillion gigabytes. This
rapid increase in data production through connected 5G devices
is known as the massive Internet of Things (mIoT), which will ac-
celerate the drive to digitalisation. Many of these 5G connected
devices will use Edge Computing to deliver super-fast, low laten-
cy, AI powered data services directly on the device without need-
ing to access the cloud. 5G is so much more than just faster 4G.
Together with mIoT and ‘AI on the Edge’, 5G is the gateway to au-
tonomous systems at scale and human-machine collaboration that
will make pre-connected human beings look like dinosaurs. (Rich-
ard Foster-Fletcher, Digital Strategist, Boundless Podcast)3
However, critics of AI voice fears over privacy and cybersecurity with

5G and IoT having prompted governments to develop a stronger stance
on AI governance. The European Union (EU) released guidelines for
regulating AI in a white paper, applying to ‘high-risk’ technologies
with high privacy concerns, such as healthcare, transport and surveil-
lance. For example, the impact of certain AI is deemed “high risk” by
the EU – such as AI tools used in recruitment, as it may affect work-
ers’ rights. They acknowledge that AI has a huge impact on society,
and EU citizens must be protected in order to keep trust high. In do-
ing so, the EU has pledged to create an ‘ecosystem of trust’, ensuring
that tech firms comply with EU regulations and allowing citizens to
adopt AI technologies with confidence. These governance plans are
promised to be embedded into 5G planning – even to the extent of
re-evaluating political and country affiliations of network providers.
2 AT&T Business Editorial Team. “5 Ways 5G Will Transform Healthcare”. AT&T. htt-
ps://www.business.att.com/learn/updates/how-5g-will-transform-the-health-
care-industry.html.
3 https://boundlesspodcast.co.uk/.

Naeema Pasha
5 Skills Building – Adapting for Surviving and Thriving
It is only through understanding the realities of any climate, both inter-

nal and external, and adapting effectively, that most creatures survive.
We are experiencing a new reality shaped by a major shift that is im-
pacting jobs from both AI and the pandemic, and we need to push our
minds further, understanding that we will need a mindset for constant
‘adaptability’ to build the relevant skills to thrive. Stimulus in skilling
from the UK government comes from the UK Office for Artificial In-
telligence (OfAI), which has three main aims: ensuring that AI has a
positive impact on society, enabling adoption of AI across industries,
and upskilling and investment. Key policies include increasing invest-
ment in R&D to 2.4% of GSP by 2027, investing £406 million in STEM
education, and an additional £64 million for a National Retraining
Scheme, enabling lifelong learning in digital and construction indus-
tries. In addition, the EU has developed an ‘ecosystem of excellence’
with small and medium-sized enterprises (SMEs) to boost innovation
and the economy. This is an attempt to attract investment in Europe-
an AI, and in turn stimulate the job market. The EU Commission is al-
so developing a Skills Agenda with the goal to upskill everyone within
Europe – with a specific effort on women to enter technology.
Josie Cluer, EY’s lead partner on skills and learning, argues for a
“skills-led recovery”. She says “skills is a key driver of growth, pro-
ductivity, and the government’s levelling up agenda. So the Prime
Minister’s plan to ‘build build build’ has to be underpinned by in-
vestment in ‘skills skills skills’. Organisations too, need to invest
in the skills of their people, because the capabilities they need will
be different to those pre-COVID. And last, individuals themselves,
wherever they are in the labour market, will need to invest in their
own skills, for employment and progression”.4
Essentially at the core of any governmental role on re-skilling is en-

couraging both organisations and individuals to have a ‘learning
orientated’ mindset. This supports the underlying theory and ap-
plications in the dynamic approach to both individual and organi-
sational development. Two ‘dynamic’ approaches show key skills to
survive – and thrive. The first is Dynamic Capabilities, which offers
a methodology for organisations to gauge changes and adapt to vol-
atile and complex challenges (Teece 2019) and the second is Career
Dynamism (Pasha 2020), which offers a career delivery model that
enables people to develop adaptive qualities for career uncertain-
ty. The concept of dynamic capability suggests it is organisational
4 https://www.henley.ac.uk/articles/why-we-need-a-skills-led-recovery.

Naeema Pasha
adaptive skills that enable “the firm’s ability to integrate, build, and
reconfigure internal and external competencies to address rapidly
changing environments” (Teece, Pisano, Shuen 1997). Dynamic Ca-
pabilities methodology suggest AI offers firms competitive advan-
tage through creating efficiencies (such as RPAs, voice assistants,
blockchains, and bots) and innovations through 5G and IoT. Career
Dynamism showed those people best at managing chaos and uncer-
tainty have demonstrable ‘future of work’ skills for work that is both
uncertain and volatile in nature (Pasha 2020). Abilities such as ‘ca-
reer-resilience’ enables people to be both adaptive and pro-active,
by demonstrating capabilities such as self-reliance and motivation to
learn as well a positive self-concept by truly valuing their personal
abilities. Career Dynamism highlights critical qualities such as hu-
man skills of creativity, openness and an ability to build positive re-
lationships. These are crucial skills, because robots will undertake
routine, data-heavy, mundane and dangerous work, leaving the pos-
sibility of unknown new jobs which will unquestionably be focused
on such human qualities.
6 What Might a ‘New Normal’ Mean for Us?
No man ever steps in the same river twice, for it’s not
the same river and he’s not the same man.
Heraclitus
We are in a ‘new-normal’, despite so many things looking similar. We

have shared experiment of living and working through COVID-19. At
the same time, major activist movements occurred during the pan-
demic, such as the Black Lives Matter movement, resulting in com-
panies examining their diversity and inclusion culture – asking if
they really do offer parity and equality. It is essential, therefore, that
AI development is aligned to societal norms. Thus, software used in
monitoring employee experience must ensure ethical diversity and in-
clusion practices, and be mindful of privacy needs of employees. For
example, ensuring transparency in extracting building usage data
and personal information from wearable tech, such as Fitbits and Ap-
ple watches. The role of ‘Responsible AI’ (Zhu 2019) will increasingly
be a core activity that most tech producers are placing into their build
strategy. Many firms are now using a multi-stakeholder approach to
consider wider implications of AI, to ensure good governance, diver-
sity and social impact. In building more ethical and responsible AI
strategies, companies should build AI to align with the ‘meaning and
purpose’ of corporate strategy – and both organisations and individ-
uals will need to consider dynamic capabilities to achieve sustaina-
ble growth (Harreld, O’Reilly, Tushman 2007).
Naeema Pasha
The pandemic has forced huge changes in the world of work, a

world that was also starting to experience dramatic change from
AI. If we can adapt well and evolve to the changes the pandemic has
caused, and adopt AI effectively, firms are likely to see better levels
of productivity and growth. And with it, they may see their employ-
ees being happier, better skilled and have more adaptability and re-
silience to withstand future challenges.
Bibliography
Arthur, M.B. (1994). “The Boundaryless Career: a New Perspective for Organ-
izational Inquiry”. Journal of Organizational Behavior, 295-306. https://
doi.org/10.1002/job.4030150402.
Harreld, J.B.; O’Reilly III, C.A.; Tushman, M.L. (2007). “Dynamic Capabilities at
IBM: Driving Strategy into Action”. California Management Review, 49(4), 21-
43. https://doi.org/10.2307%2F41166404.
IDC (International Data Corporation) (2018). “The Digitization of the World From
Edge to Core”. Framingham. https://bit.ly/2D31BCw.
European Commission (2020). “White Paper: On Artificial Intelligence – A
European Approach To Excellence And Trust”. Brussels. https://bit.
ly/2CJJ8ek.
McKinney, S.M.; Sieniek, M.; Godbole, V. et al. (2020). “International Evaluation
of an Ai System for Breast Cancer Screening”. Nature, 577, 89-94. https://
doi.org/10.1038/s41586-019-1799-6.
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ly/2WUZeIT.
Meyer, H. (2019). “Five Policies to Deal with the Loss of Jobs to Automation
(Ubi is not One of Them)”. LSE Blogs, 12 April. https://bit.ly/2EhBisR.
Office for National Statistics (2019). “Which Occupations are at Highest Risk of
Being Automated?”. ONS, 25 March. https://bit.ly/3hCVFij.
Parsons, T. (1949). Essays In Sociological Theory, Pure And Applied. Glencoe (Il-
linois): The Free Press.
Pasha, N. (2020). “Responding to Career Uncertainty: Applying a ‘Dual-Empa-
thy’ Approach to Career Development Using Corporate Strategy Theory”.
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44(1), 44-50. https://doi.org/10.20856/jnicec.4407.
Teece, D. (2019). “A Capability Theory of the Firm: an Economics and (Strate-
gic) Management Perspective”. New Zealand Economic Papers, 53(1), 1-43.
https://doi.org/10.1080/00779954.2017.1371208.
Teece, D.; Pisano, G.; Shuen, A. (1997). “Dynamic Capabilities and Strategic
Management”. Strategic Management Journal, 18(7), 509-33. https://
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SMJ882%3E3.0.CO;2-Z.
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Workforce Strategy for the Fourth Industrial Revolution”. http://www3.
weforum.org/docs/WEF_Future_of_Jobs.pdf.
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20 June. https://www.weforum.org/agenda/2019/06/4-steps-to-
developing-responsible-ai/.

COVID-19 and Its Impacts

on Talent Mobility in China
Mikkel Rønnow Mouritzen
Roskilde University, Denmark; University of Chinese Academy of Sciences
and Sino-Danish Center for Research & Education, Beijing, China
Shahamak Rezaei
Roskilde University, Denmark; Sino-Danish Center for Research & Education, Beijing, China
Yipeng Liu
Abstract COVID-19 has caused countries around the world to close their doors and put
strict measures on the mobility of people across geographical boundaries. What will be
the impact on highly skilled talent? We address this important question by exploring the
experiences of European researchers in China during COVID-19. We do so by utilising the
newest unique data gathered in a survey by EURAXESS, which reports that 47% of the
European researchers in China left due to the outbreak. We complement this with archive
data, interviews, and COVID-19 regulations to discuss and forecast future scenarios for
talent mobility to and from China.
Keywords COVID-19. Talent mobility. International researchers. Brain circulation. Trav-

el barriers.
Summary 1 Introduction. – 2 Talent Mobility: Why It Matters. – 3 Talent Mobility on the

Rise in EU: China as a Partner or Competitor. – 4 Talent Mobility in China: Traditionally a
Brain Drain, But Becoming Competitive. – 5 Data and Methods. – 6 COVID-19 Impact on
Cross Border Mobility. – 7 European Talents in China. – 8 Conclusion.

ISBN [ebook] 978-88-6969-442-4
Open access 309
DOI 10.30687/978-88-6969-442-4/024
Mikkel Rønnow Mouritzen, Shahamak Rezaei, Yipeng Liu
1 Introduction
In a recent article, Liu, Lee, and Lee (2020) highlight how the COV-
ID-19 pandemic is already having severe effects on both the glob-
al economy and global value chains. They emphasise that it is still
too soon to draw definite conclusions concerning the consequenc-
es of the pandemic. However, they still point out an emerging trend,
which shows that global supply chains are decoupling from China
because of the pandemic. Moreover, they argue that this is happen-
ing in a time when there is a drastic reduction of air travel as well as
severe travel restrictions (Liu, J.M. Lee, C. Lee 2020). In this chap-
ter, we continue the discussion of migration and travel restrictions
by exploring the effects of the pandemic on talent mobility amongst
European researchers in China. Talent attraction policies have be-
come increasingly important globally (OECD 2008). This has opened
doors for academics around the world, only to come to a rapid halt
because of COVID-19. The transformative issues arising in academ-
ia are highlighted in a recent series of articles published in Nature
entitled “Science after the pandemic” (Witze 2020). The series ex-
plores some of the dramatic changes that have occurred in academ-
ia resulting from the COVID-19 outbreak. These issues include topics
such as: what will happen to the nature of conferences, travel, and
mobility? (Viglione 2020); what is occurring at now empty campuses?
(Witze 2020); and how might publications change? (Callaway 2020).
But they also deal with the effect on Chinese academia, which oth-
erwise seems to have been on the rise since China became amongst
the leading funders of researchers and the leading producer of aca-
demic articles (Cyranoski 2020). In this chapter, we will discuss what
is happening to foreign researchers in China. We will mainly look in-
depth at European researcher’s experiences and discuss the impact
on European and Chinese scientific collaborations.
2 Talent Mobility: Why It Matters
Global flows of talent have become an increasingly important ele-

ment of globalisation (Liu 2019). Whether in the public or private
sector, the recruitment of individuals that can make a difference in
organisations have become one of the key challenges of the decade
(Lee, Rezaei 2019). In an article published before the COVID-19 cri-
sis, Janger and Nowotny (2016) explore academic job choices and the
international mobility of talented researchers. They find that in gen-
eral job choices in academia are driven by factors such as collabora-
tion partners, research funding, and academic freedom rather than
personal factors. The literature on talent mobility suggests that the
US is the first destination country for researchers and that it attracts
the most substantial flows of international talent, making it able to

reap the innovative rewards that come with global talent (Kerr et al.
2016; European Commission 2017; Kerr 2018). However, other coun-
tries have caught up and developed talent attraction schemes of their
own (Shachar 2006; Shachar, Hirschl 2013, 2015). These schemes are
particularly prominent in academia and often considered beneficial
as the mobility of researchers aids in the creation and the diffusion
of knowledge, which is of significant importance to knowledge econ-
omies (OECD 2008).
3 Talent Mobility on the Rise in EU: China as a Partner

or Competitor
In an EU context, the introductions of both the Marie Skłodowska-

Curie actions programme and Euraxess have aimed to encourage mo-
bility amongst researchers. Here it is argued that:
[t]he main reason to foster geographic mobility lies in the fact that
it is related to more intense knowledge flows through international
collaboration and, as a consequence, increases scientific produc-
tivity which may, in turn, affect economic competitiveness. (Euro-
pean Commission 2017, 10)
These reasons for fostering mobility in order to compete in glob-

al research goes beyond the interest of the EU. Concerns revolving
around the opportunities as well as risks related to being at the front
of the research stage or falling behind are shared by countries such
as Brazil, South Korea, India, and China – all countries that have re-
cently been boosting the mobility opportunities for researchers (Eu-
ropean Commission 2017).
4 Talent Mobility in China: Traditionally a Brain Drain,

But Becoming Competitive
As the world’s largest transition economy, talent in science and tech-

nology is critical to the development of a flourishing knowledge econ-
omy for China (Liu, Fang 2019). Since the opening of the Chinese
economy and the increased mobility of students as well as research-
ers, China has suffered from a significant brain drain. The state, uni-
versities, and scientific organisations have therefore been part of im-
plementing measures on both a country and local level which aim at
attracting first Chinese returnees (Zweig, Kang, Wang 2020) and in-
creasingly also foreign talents (Miao, Wang 2017). These efforts have
coincided with the increased quality and the improved ratings of Chi-
nese universities as well as the development of Sino-Foreign universi-

ties (Wang, Chen 2020). Even though these efforts have been success-
ful to a certain extent, the individual talents and researchers seem
to remain mobile whether they are Chinese or foreigners (Mouritzen,
Rezaei, forthcoming).This reveals an element of vulnerability in the
talent flows towards China, so although the country fairs increas-
ingly well in the global competition for human capital, according to
the MORE3 survey (European Commission 2017) and OECD publica-
tions, China remains a relatively unattractive place for foreign tal-
ent (OECD 2013) as seen in the figure below.
Figure 1 The impact of internationally mobile scientists, inflows versus outflows, 1996-2011 (OECD 2013)
5 Data and Methods
While the data revealed significant barriers to Europeans in China that

remain relevant, new issues have arisen with the pandemic. In particu-
lar, we examined in-depth the 2020 survey conducted by Euraxess that
has highlighted the new reality facing European talents in China af-
ter COVID-19. The material deriving from Euraxess is included as the
organisation has a unique coverage within the community of Europe-
an researchers in China. We complement the survey data with quali-
tative interviews collected by one of the authors of this paper during
fieldwork in China before the pandemic and through online interviews
with respondents after the pandemic, although the data collected after
the pandemic is based on a smaller sample as many respondents were
unavailable for various reasons connected to the pandemic. Finally,
we draw upon recently published news and regulations.
6 COVID-19 Impact on Cross Border Mobility
As noted, the outbreak of COVID-19 considerably changed the aca-

demic reality globally. In China, the inflow of foreign talent has been
limited, while the outflow seems to have increased during the pan-
demic. The challenges emerging because of COVID-19 are already
influencing research activities conducted in China, particularly ac-
tivities done by the group of foreign academics operating there, hav-
ing forced many researchers to leave the country at least on a tem-
porary basis. Thus, Euraxess China reports that as of March 6, 2020:
When asked if they left China amid the virus outbreak, 47% of
researchers replied positively; among these, 63% are not plan-
ning on returning to China or are uncertain when they will. (EU-
RAXESS 2020)
The impact on foreign talents’ cross-border mobility was affected by

travel restrictions imposed by the Chinese government since March
28, 2020 (The Foreign and Commonwealth Office 2020b, 2020a),1 As
stated below:
In view of the rapid spread of COVID-19 across the world, China

has decided to temporarily suspend the entry into China by for-
eign nationals holding visas or residence permits still valid to the
time of this announcement, effective from 0 a.m., March 28 2020.
(Ministry of Foreign Affairs the People’s Republic of China 2020)
1 As the virus spread across the globe, first moving to Europe only to be overtaken
by the Americas, China was no longer the world’s hotspot. Therefore, in a grander at-
tempt to combat COVID-19, China implemented a string of restrictions on internation-
al travel. These included the suspension of the entry of most foreign nationals – even
those who were holding valid visas that were issued before the announcement on March
26, 2020 (China Briefing 2020). Apart from all short-term visas such as transit visas
and port visas lasting 72 to 144 hours, the visa restriction includes student visas, work
permits, family visas, regular tourist visas, etc. Furthermore, they include such mo-
bility options as the Asia Pacific Economic Cooperation (APEC) Business Travel Card
(ABTC), which otherwise allowed individuals to move temporarily between fully par-
ticipating economies for five years (China Briefing 2020). The few holders of the diffi-
cult to obtain green card (China Briefing 2019) are not subjected to restrictions (Eu-
ropean Union Chamber of Commerce in China 2020b). It will only be visas issued after
March 26, 2020 that will not be affected by the recently imposed restrictions (Minis-
try of Foreign Affairs the People’s Republic of China 2020).

The restrictions only became additionally significant, as many re-

searchers had already left China to avoid the virus following the
COVID-19 outbreak. As foreign holders of most visa types were no
longer eligible to enter China, the restrictions have deeply affected
international talents operating in China (European Union Chamber
of Commerce in China 2020a). As a result, the European Chamber
President contacted the Chinese Minister of Foreign Affairs to ad-
dress the matter and request the easing of the restrictions. Accord-
ing to the European Chamber:
The Ministry of Foreign Affairs’ (MFAs’) official response recog-

nised and thanked the Chamber for its support in China’s fight
against COVID-19, and clarified that Chinese green card holders
are not subject to the entry restrictions. It also stated that a fast-
track system will be established for foreign nationals who need to
return for urgent/necessary purposes, such as trade, science and
research or humanitarian reasons. (European Union Chamber of
Commerce in China 2020b)
Foreign nationals returning to China for necessary “economic, trade,

scientific or technological activities or out of emergency humanitar-
ian needs” will however still need to apply for a visa in order to en-
ter China at the Chinese embassies or consulates abroad and under-
go a quarantine period, affecting the travellers for at least 14 days.2
Moreover, there have also been severe restrictions on international
flights, initiated on March 12, 2020 (Business Traveller 2020; Reu-
ters 2020), so that only 20 international flights could land each day.3
By the end of May, it was decided to maintain the restrictions with
few exceptions (BBC 2020; Nikkei Asian Review 2020).
2 Travellers will be required to undergo strict testing and individuals will be subject-
ed to a quarantine period of 14 days, although it is possible to enter into a fast-track op-
tion available to individuals from countries that have signed fast track agreements with
China. However, this requires that the company ensures that the employer remains in a
closed circuit or a sealed of environment for 14 days, where a designated driver trans-
ports the individual from their home residence to their workplace without this employ-
ee having any physical contact with other members of the staff or other parts of socie-
ty (European Union Chamber of Commerce in China 2020a).
3 The Civil Aviation Administration of China (CAAC) further implemented changes
that reduced air travel to and from China, taking affect from March 12, 2020. These
changes included a reduction of international flights such that Chinese Airlines could
only maintain one route to any country with no more than one flight per week. A sim-
ilar rule affected foreign airlines that were only allowed to maintain a single route to
China and only fly once per week. Moreover, the rules state that each flight must “en-
sure passenger load factor no higher than 75%” (CAAC 2020).

7 European Talents in China
The restrictions have particularly affected the foreign community of

mobile expats in China, both those who left China at the onset of the
pandemic and the ones who stayed behind. Nevertheless, they are on-
ly a part of the pandemic’s transformational force that we will discuss
later, relying on a survey developed and disseminated by Euraxess
China where 46 European researchers based in China responded. The
survey was an early response to the COVID-19 crisis, and some of the
results were published on March 6, 2020 (EURAXESS 2020). Current-
ly, we are working with Euraxess to develop and disseminate new ma-
terial that will be available at a later stage. While the low numbers
challenge the representativeness of the survey, the data is still a re-
liable indicator of changes affecting talent mobility. When asked “Is
the novel coronavirus outbreak and the resulting prevention-and-con-
trol measures having any current impact on your work and research
activities?”, close to 75% of the respondents replied that it had a me-
dium or high impact on their activities, as illustrated below.
Figure 2 Is the novel coronavirus outbreak and the resulting prevention-and-control measures having any
current impact on your work and research activities? With 56% responding Yes, high impact, 30% responding
Yes, medium impact, 6% Yes, low impact, 2% no impact and 4% responding not possible to evaluate now
This finding resonates with qualitative interviews conducted amongst

researchers based in China. Amongst these respondents, of which
many are now living in Europe as they have been blocked from re-en-
tering China, a variety of answers emerged. Researchers who for var-
ious reasons decided to stay in China reported that they faced empty
campuses and closed laboratories where only they could come and
go. While this situation seems to be the new normal which has spread
to most of the universities of the world (Witze 2020), the group of re-
searchers stuck outside of China have been affected in slightly differ-
ent ways with online meetings that at times have to include people
based in both the EU and America as well as China. Moreover, most
communication seems to have moved online – both the communica-
tion between individuals, such as a student and supervisors, but also
institutional communication. When asked “Are you and/or your insti-
tution introducing or planning on introducing new online tools (such
as online classes, webinars, online meetings, and group works) as an
alternative to the normal activities?”, close to 80% of the respond-
ents reported that they either had implemented new online tools or
were working on implementing new measures.
Figure 3 Are you and/or your institution introducing or planning on introducing new online tools
(such as online classes, webinars, online meetings, and group works) as an alternative to the normal
activities? With 59% responding that Yes, we have launched new online activities/tools,
20% responding Yes, we are working on that and 22% responding no
Like most institutions, Chinese universities have adapted to reali-

ty after COVID-19, and while it is still unknown what the exact ef-
fects of the pandemic will be on learning as well as migration, it is
clear that university institutions across the globe are updating their
teaching tools to address a new reality. In particular, the Sino For-
eign Universities have reported challenges faced by their cohorts
being scattered across the globe and their staff being unable to re-
turn to China [tab. 1].

Table 1 Challenges and solutions from four Sino Foreign university institutions
Challenges Initiatives that are dealing Initiatives that are dealing

with COVID-19 in the short with COVID-19 and changes
term in the long term
Some international staff Fast transition to online teaching Planned online teaching ranges
and students unable to return within the first month of COVID-19 from supporting the teachers
to China. These are advised to filling in full semesters
against returning to China. for international students
and staff blocked by entry barriers.
Most radically seen through
the Sino-Danish Center, which
plans a full-semester online
Reduction or cancellation Online graduation ceremony
of physical activities, such as: and other online events,
teaching activities, ceremonies, such as choir contests and
research activities, and PhD introductions to campus life
exchange activities
Reimbursed housing Flexible semester starts, opening
according to Chinese as well as
global dynamics
Table based on publicly available information at New York University Shanghai (2020b, 2020a), Nottingham
University Ningbo (University of Nottingham Ningbo China 2020b, 2020a), Duke Kunshan University (2020b,
2020a) and Sino-Danish Center (SDC 2020). Moreover, this is a brief collection of the most fundamental and
reoccurring challenges related to travel barriers and entry issues. Research that would dive deeper into the
actual institutions would reveal other issues and solutions, such as wearing masks on campus and connections
between health initiatives in the university and the province.
Just like the challenges faced by the transnational institutions, indi-

vidual researchers collaborating between China and Europe report
that their collaborations have suffered during the pandemic. When
asked “In case you are involved in collaborations between China
and Europe, have they been affected in some way by the current out-
break?”, a third of the respondents answered that it have had an im-
pact, but that the impact is difficult to assess at the early stage, while
another third replied that it already either had a medium or highly
negative impact on their collaborations.

Figure 4 In case you are involved in collaborations between China and Europe, have they been affected in
some way by the current outbreak? With 13% responding Yes, high negative impact, 28% responding Yes,
medium impact, 33% responding Yes, but I cannot state what will be the impact, 4% responding No impact
and 22% responding I’m not involved in any China-Europe collaboration
8 Conclusion
COVID-19 has abruptly put an end to talent mobility and talent flows.
Early data suggests that research, teaching, and mutual collabora-
tion shared by China and Europe will be significantly disadvantaged
because of the pandemic. The barriers emerging include both trav-
el restrictions and a significant reduction in the infrastructure that
facilitates mobility across borders. This might have even stronger ef-
fects in the future by hampering students, researchers, and tech-
nicians from either entering a country in the first place or from re-
turning to their country of origin. Moreover, teaching is changing
significantly, and particularly transnational institutions are forced
to apply online tools that may limit the exposure to other cultures
and thereby hinder shared experiences in the time to come. Finally,
it seems likely that collaborations across borders will be increasing-
ly difficult to carry out. However, what this difficulty will mean for
talent mobility and foreign talents spread out across the globe has
yet to reveal itself fully. Therefore, questions relating to COVID-19’s
impact on talent mobility should be raised and answered based on
in-depth empirical research.

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Part 10
AI and Big Data
323
Artificial Intelligence and Data

Analytics in Digital Business
Transformation Before, During
and Post COVID-19
Kecheng Liu
Informatics Research Centre, Henley Business School, University of Reading, UK
Hua Guo
Informatics Research Centre, Henley Business School, University of Reading, UK
Abstract Business activities have become highly dependent on the functions that digi-
tal technologies offer. The role and critical value of digital technologies such as artificial
intelligence and data analytics are clearly witnessed during the COVID-19 pandemic. It is
hard to just imagine what the world would become if there were no Internet and digital
technologies during these times. The trend and potential value of artificial intelligence
and data analytics to leverage and transform organisations are explored, with challenges
identified and directions offered to make businesses ready to embrace future unknowns.
Keywords Artificial intelligence. Data analytics. Digital transformation. Technology

impact. Technology in pandemic.
Summary 1 Artificial Intelligence and Big Data Before and During COVID-19 Pandemic.
– 2 The Trend of AI & Big Data Development in Post-Pandemic. – 3 The Challenges in Using
Data Effectively for Social and Economic Analyses.

ISBN [ebook] 978-88-6969-442-4
DOI 10.30687/978-88-6969-442-4/025
Kecheng Liu, Hua Guo
Artificial Intelligence and Data Analytics in Digital Business Transformation
1 Artificial Intelligence and Big Data Before

and During COVID-19 Pandemic
Data has become one of the most valuable assets to determine the
success of businesses and public sector institutions globally. Arti-
ficial intelligence (AI) and data analytics are the key factors to un-
lock the value of data assets. Data has played a vital role in the battle
against COVID-19. From predicting epidemic progression, detecting
infections and diagnosis, accelerating clinical discovery, optimising
resource allocation, and supporting public policymaking, in almost
every aspect of the epidemic response, AI and big data have made
a positive contribution to strategic decision-making and operation-
al measures.
From the perspective of different beneficiaries, with the help of
AI and big data applications, data-driven pandemic responses have
taken many forms:
• The public can access the latest statistics to understand the dy-
namic of the pandemic (WHO 2020b); get information on pre-
vention (WHO 2020a; NHS 2020); receive notifications on the
potential risk of infection – contact tracing (Google 2020); and
get diagnostics or treatment advice from doctors (GSMA 2020;
Ghosh, Gupta, Misra 2020). Transparent and sufficient infor-
mation exchange avoids unnecessary panic among the public
and helps cooperation.
• AI and big data modelling help governments to improve virus
surveillance and responses via outbreak predictions (Ardabili
et al. 2020; Strzelecki 2020), spread tracking (Zhou et al. 2020),
resource allocation (Morariu et al. 2020; Ibrain, Salluh 2020),
and policy decisions support (Gao et al. 2020; Gatto et al. 2020).
• AI empowered health institutions and agencies with quick com-
puted tomography (CT) scan image recognition systems (Huang
et al. 2020; Mei et al. 2020). In China, more than 100 hospitals
employed AI image recognition in lung CT identification which
helps with large-scale infection testing (Cheng 2020). Biomedi-
cal research might be the one that benefits the most from AI and
big data technology (Mamoshina et al. 2016). The vast amount
of biomedical data forms the foundation of genomic sequence
analysis, drug discovery and vaccine development (Stebbing et
al. 2020; Beck et al. 2020). The global race for coronavirus vac-
cine is essentially a competition to leverage the advantage of
AI and big data in bioscience (Magar, Yadav, Farimani 2020).

2 The Trend of AI & Big Data Development in Post-Pandemic
With regard to the accelerated adoption of AI and big data, we recog-

nise three trends that are likely to influence the post-pandemic period.
The first trend is an accelerated digital transformation in vari-
ous industries with the purpose to compete or even survive through
digitisation of the production and delivery of products and services by
deployment of technologies such as AI and data analytics. During the
lockdown period, the digitisation in enterprise activities and virtual
business grew fast, partly driven by the restrictions on the traditional
way of conducting business. The increased mode of digital business pro-
cesses may become the new normal for enterprises, public sectors and
individuals. Therefore, traditional enterprises face an urgent necessi-
ty for digital transformation to servitise their offerings (Tien 2015) and
use technical platforms to conduct business in digital business ecosys-
tems (Liu, Guo, forthcoming). To a large extent, as commented by At-
kins (2020), “COVID has been the catalyst for digital transformation at
scale”. However, enterprises should maintain a balance between their
long-term strategic targets and the immediate company benefits that
come from technological solutions, which may pose organisational chal-
lenges. In a recent survey (NewVantage Partners 2019) administered to
65 Fortune 1000 leading firms, about one third reckoned that they are
not data-driven companies yet even though they have already adopted
big data and AI and would still increase their investment in those ar-
eas. It follows that the journey of digital transformation for organisa-
tions is a long-term commitment that will require a radical shift of the
mindset of the leadership and changes in business operations and cul-
ture across the firm (Liu, Li 2015).
The second trend is an increased exploitation of big data which
bears broad implications for all sectors. Data harnessing involves a
wide scope of activities starting from the ownership of data or digital
sovereignty, to data collection, storage, management and utilisation.
This raises a number of challenges. For instance, digital sovereignty
is a highly debated issue that is still under the spotlight (Pinto 2019).
When organisations grapple with increasingly larger data sets, they
gradually improve their ability to change the landscape of business
competition. Therefore, enhancing the ability of harnessing big data
is critical to a company’s long-term development.
The third trend is an easing of the bottleneck due to algorithm ma-
turity. In a review conducted by Bullock et al. (2020), a broad range
of AI-driven applications which are used against COVID-19 have been
examined. The disappointing finding is that few of the current AI sys-
tems are mature enough to make a substantial operational impact
in the fields of epidemiology, diagnosis and therapy. A conclusion de-
rived from the study is that “AI systems are still at a preliminary
stage, and it will take time before the results of such AI measures
are visible” (Petropoulos 2020). The constrains mainly come from

the lack of solid historical training data and the lack of quality data
without noise and outliers (Naudé 2020).
These three trends are interrelated as progress in one area accel-
erates the advancement of others. The development of technological
capabilities and the penetration of technologies to business practices
and people’s lives will bring profound changes in the years to come.
3 The Challenges in Using Data Effectively for Social

and Economic Analyses
The need for and benefit from collaborative work in science and tech-
nology across disciplines and geographic boundaries have been rec-
ognised and even amplified during the COVID-19 pandemic. For ex-
ample, since the National Oceanic and Atmospheric Administration
(NOAA) has made their dataset open access, 68,000 other datasets
have become publicly available (NOAA 2018). Those datasets have
promoted innovations in weather applications and promoted scientific
research in related fields. Other examples are the MIMIC open data-
set, which was developed by the MIT Lab for Computational Physiol-
ogy (Moody, Mark 1996) and the datasets of the Beth Israel Deacon-
ess Medical Center (BIDMC) (Johnson et al. 2016). After more than
20 years of continuous maintenance and updating, BIDMC continues
to make the datasets open to researchers as a comprehensive clini-
cal and physiologic data source, which has led to significant contri-
butions to research in the medical field.
Although great advantages are reaped in technological innova-
tions from data openness, potential concerns relate to data misuse
and the consequences of breaching data security. As new privacy and
data protection laws are gradually put in place in many jurisdictions,
the possible conflicts of interests between data openness and priva-
cy become a significant factor in preventing the adoption of big data
technology and AI. In order to solve privacy and security issues, re-
searchers have attempted to train AI algorithms without using sensi-
tive data. Federated learning (Konečný et al. 2016a, 2016b; McMahan
et al. 2016) is one of the promising solutions which adopts decentral-
ised collaborative machine learning and have been applied in retail,
healthcare, and fintech (Yang et al. 2019). Due to differences in cul-
tural backgrounds and strategies in the development and application
of new technologies, different geographical regions have put differ-
ent emphasis on data privacy. This represents a challenge for data
re-use and sharing across industries and countries.
AI ethics is a topic that is much debated in academic and indus-
try circles. Due consideration on AI ethics is needed during the pro-
cess of system development. Dignum (2018) classifies AI ethics into
three levels: ethics by design, ethics in design and ethics for design.
These focus, respectively, on 1) AI’s capabilities in ethical reason-
ing, 2) the methods of analysis and evaluation of AI’s ethical impli-
cations, and 3) the code that should be adopted to ensure the ethi-
cal integrity of developers and users. AI ethics is not just a technical
issue. Rather, it is a social concern with broad implications. The Eu-
ropean Union published the first draft of ethics guidelines for trust-
worthy AI (HLEG) in December 2018 with the purpose of leading the
discussion. Although there is still a long way to go before key regula-
tions are in place, we believe that researchers in the relevant fields
have a critical role to play for the safe and ethical deployment of AI
in business, government sectors and society at large.
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sus.2020.03.005.

Reshaping the Future

Unlocking the Potential
of Alternative Data
for the Post-COVID-19 World
Hung-Yi Chen
Zhejiang University International Business School, China
Abstract Alternative data has steadily become more mainstream in investment de-
cision-making. These non-traditional datasets provide a channel to draw insights from
information as diverse as satellite images, news, tweets, mobile and internet traffic and
credit card purchases. While alternative data has become an industry buzzword, mak-
ing meaningful use of it remains a challenge. The ongoing financial crisis caused by the
COVID-19 pandemic poses unprecedented challenges. This chapter explores examples
of how alternative data can be used to help economic recovery.
Keywords Alternative data. COVID-19. Data interface. Decision-making.
Summary 1 Introduction. – 2 Alternative Data Applications. – 3 Conclusion.
1 Introduction
As many countries around the world continue to face unprecedented challeng-

es from COVID-19, the longer-term economic impact of the crisis is uncertain.
In the best-case scenario, the path out of the pandemic-induced recession may
be ‘V-shaped’, that is, a quick rebound. But a protracted ‘U-shape’ or ‘L-shape’
recession or a ‘W-shape’ double-dip recession caused by another wave of in-
fections may not be ruled out at present. How should governments respond to
this situation? Could technology and alternative data sources be leveraged to
correct the current economic contraction and pave the way for a fast recovery?

ISBN [ebook] 978-88-6969-442-4
Open access 333
DOI 10.30687/978-88-6969-442-4/026
Hung-Yi Chen
Reshaping the Future. Unlocking the Potential of Alternative Data for the Post-COVID-19 World
Alternative data comprises information as diverse as satellite im-

ages, news, tweets, mobile and internet traffic and credit card pur-
chases. For example, Bloomberg, a data provider, offers a Tesla pro-
duction tracker (Randall, Halford 2019) that monitors the vehicle
identification numbers (VINS) registered by Tesla with safety regu-
lators before production and VINS submitted to Bloomberg by Tesla
car owners. This enables Bloomberg to provide real time forecasts of
Tesla production rather than rely on infrequent (i.e. quarterly) com-
pany reports. Other examples are Nasdaq’s acquisition of Quandl,
one of the largest alternative data platforms,1 and Refinitiv’s part-
nership with BattleFin to integrate alternative datasets with Eikon
and its quantitative analytics platform.2
These non-traditional datasets also provide a channel to draw in-
sights from the financial profile of a consumer or business. These data
sources have the potential to overcome barriers to financial inclusion
and enable more diversified risk assessment models for marginalised
individuals or small and medium-sized enterprises (SMEs). Over the
last few months, most SMEs have likely seen their liquidity buffers
come under pressure because of the pandemic-induced economic slow-
down (OECD 2020). It is therefore necessary to accelerate the digiti-
sation of the financial industry in order to provide new frameworks
for credit decisions, as small businesses and the self-employed are ex-
tremely vulnerable. While there is still substantial scepticism over how
useful this new information will ultimately prove to be, this chapter
seeks to review potential solutions and draw early lessons in order to
effectively cope with, recover from or adapt to today’s challenging sit-
uation. For example, in the current context, it is of interest to identify
effective ways to exploit alternative datasets to inform prompt correc-
tive actions in response to the global economic recession. This could
include, for instance, impact analyses of markets and industry sec-
tors such as healthcare, consumer goods, transportation and utilities.
2 Alternative Data Applications
The use of alternative data for trading purposes is not new. Inves-
tors have always been adept at using it to gain an informational edge
in the market. Venetian traders would use telescopes to inspect the
flags of incoming ships in order to derive clues as to the type of car-
1 “Nasdaq Acquires Quandl to Advance the Use of Alternative Data”. Nasdaq, 4 De-
cember 2018. https://www.nasdaq.com/about/press-center/nasdaq-acquires-
quandl-advance-use-alternative-data.
2 “Refinitiv Makes Strategic Investment in BattleFin and Partners to Incorporate Al-
ternative Datasets within Investor Workflow”. Refinitiv, 18 June 2019. https://refi-
ni.tv/3jeZDQ6.

Hung-Yi Chen
go being carried and also what commodities they would buy or sell
accordingly (Wigglesworth 2020).
The ongoing financial crisis caused by the COVID-19 pandemic
is unconventional, which has led investors to seek alternative data
with the purpose of seeing when the market rebound is likely to be-
gin (Georgiadis, Lockett, Wigglesworth 2020). Analysts mine figures
from traffic congestion to food-delivery apps. For example, the traf-
fic index provided by Tom Tom employs data from 600 million driv-
ers to gauge the level of congestion in 416 major cities worldwide.
It showed that the traffic congestion level of Wuhan, China, during
the lockdown, was obviously lower than the previous year.3 Howev-
er, correlation can be misinterpreted as causation. For instance, the
travel data provided by the Transportation Security Administration
suggests that the number of Americans flying has been gradually in-
creasing since its nadir in mid-April.4 Further, data from Apple shows
that more drivers have been searching for directions in the US since
April, which might suggest that the economy is starting to recover.5
Is this the evidence that the economic rebound is beginning? Or is
there no relationship and the number is increasing purely because
people feel more confident or just tired of the lockdown conditions?
Without rigorous research, alternative data does not offer a clear pic-
ture of where the economy is heading or how quickly we might be
able to go back to pre-crisis conditions.
Traditional monthly economic indicators such as GDP performance
are released weeks or months after the events take place, and may be
difficult to use for decision-makers to predict new economic trends
and make timely decisions. As an economist aptly suggested, “Obvi-
ously, slow data is not helping us right now. We need to start look-
ing at fast data: data arriving at a daily or weekly frequency” (Mc-
Cracken 2020).
How we can access and utilise alternative data efficiently poses
a serious challenge to its exploitation. According to Refinitiv, 80%
of data is unstructured and must be processed into structured con-
tent (Gaumer 2020). How to use unstructured data? For example, un-
structured text analysis via machine learning algorithm can be used
to evaluate the credit risk and default potential of a company. To this
end, relevant unstructured data sources include conference call tran-
scripts, company filings and related news. However, finding, testing
and using data costs considerable time, energy and money. It there-
3 “Coronavirus: Green Shoots?”. Financial Times, 2 March 2020. https://ftalphav-

ille.ft.com/2020/03/02/1583143211000/Coronavirus--green-shoots-/.
4 “TSA Checkpoint Travel Numbers for 2020 and 2019”. Transportation Security Ad-
ministration, 2020. https://www.tsa.gov/coronavirus/passenger-throughput.
5 “COVID-19 Mobility Trends”. Apple, 2020. https://www.apple.com/covid19/mobility.

Hung-Yi Chen
fore requires time and human resources that may not be affordable
to every decision-maker.
Both BattleFin and Quandl, leading financial and alternative da-
ta providers, offer a solution for enabling their clients to easily ob-
tain financial data in the form of an Application Programming Inter-
face (API).6 This saves people a lot of time in obtaining, cleaning and
processing the data. So, access to the data is not enough, but rather
how data can be easily utilised to generate meaningful analysis. For
example, the New York Federal Reserve’s Weekly Economic Indica-
tor7 is an example of how high-frequency data was compiled to pro-
vide a measure for current economic conditions. In particular, the
key question is how to transform unstructured data into structured
content, and also whether to encourage the use of APIs as key ele-
ments for data integration.
QR codes were used to track the health status of citizens and their
movements during the pandemic in several countries. A QR code is
an example of how we can build an interface for efficiently utilis-
ing alternative data in the digital world. In the last few months, Chi-
na has rolled out health code systems across cities (Weinland 2020)
with the purpose of identifying those who visited areas with high in-
fection rates or who had been diagnosed with the virus, as well as to
track whether individuals had completed a mandatory quarantine.
Russia, France, Qatar, and many other countries also adopted simi-
lar measures to control the spread of the coronavirus.
3 Conclusion
The pandemic crisis spread extremely quickly across countries and

much of its economic impact is likely yet to be seen. The ongoing fi-
nancial crisis is, in many ways, atypical. In the face of the unprec-
edented nature of current challenges, this chapter presented some
examples of how alternative data can be used to support decision-
making. As the pandemic and its effects are likely to linger for some
time, it is important that any informational advantage offered by new
sources of data to improve our response to new infections and put
our economies on a solid path to recovery is utilised to its fullest. Al-
ternative data appear to offer promising solutions to today’s world
problems. Harnessing their power is the challenge of our current
times and an opportunity to increase the resilience of our society.
6 “Financial Data API”. Quandl, 2020. https://www.quandl.com/tools/api.

7 “Weekly Economic Index (WEI)”. Federal Reserve Bank of New York, 2020. https://
www.newyorkfed.org/research/policy/weekly-economic-index.

Hung-Yi Chen
References
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telligence”. http://dx.doi.org/10.2139/ssrn.3521349.
Gaumer, T. (2020). “Finding Alpha with Unstructured Data”. Refinitiv Perspec-
tives, 29 January. https://refini.tv/2DMRTEN.
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Learning in Fintech Lending: Evidence from the Lending Club Consumer
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ma.12295.
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ket Consequences of Alternative Data: Evidence from Outer Space (July 30,
2018)”. 9th Miami Behavioral Finance Conference 2018. http://dx.doi.
org/10.2139/ssrn.3222741.
McCracken, M. (2020). “COVID-19: Forecasting with Slow and Fast Data”. Federal
Reserve Bank of St. Louis, 3 April. https://bit.ly/2OVHd98.
Monk, A.H.B.; Prins, M.; Rook, D. (2018). “Rethinking Alternative Data in Institu-
tional Investment”. http://dx.doi.org/10.2139/ssrn.3193805.
OECD (Organization for Economic Co-operation and Development) (2020).
“Coronavirus (COVID-19): SME Policy Responses”. OECD, Updated 19 May
2020. https://bit.ly/2CYKUIh.
Randall, T.; Halford, D. (2019). “Tesla Model 3 Tracker”. Bloomberg, 28 May.
https://www.bloomberg.com/graphics/tesla-model-3-vin-
tracker/.
Weinland, D. (2020). “China’s Covid-19 QR Code Surveillance State”. Finan-
cial Times, 7 May. https://www.ft.com/content/eee43c3e-8f7c-
11ea-9b25-c36e3584cda8.
Wigglesworth, R. (2020). “Stockpickers Turn to Big Data to Arrest Decline”. Fi-
nancial Times, 11 February. https://on.ft.com/32SW4ta.
Zhang, T. et al. (2020). “Economic Impact Analysis of the Coronavirus, An Alter-
native Data Perspective”. https://dx.doi.org/10.2139/ssrn.3617029.
Zhu, C. (2018). “Big Data as a Governance Mechanism”. The Review of Financial
Studies, 32(5), 2021-61. https://doi.org/10.1093/rfs/hhy081.

Part 11
Travel, Tourism and Entertainment
339
Travel and Tourism

At the Frontline of COVID-19
Adrian Palmer
Abstract The travel and tourism sector was hit more rapidly and deeply by COVID-19
than most other sectors. Recovery to pre-COVID-19 activity levels is likely to be pro-
longed, and questions are raised whether enforced change in consumer behaviour will
have long-term effects. The travel and tourism sector has a history of reinventing itself,
and previous predictions of decline following crises have often been short-lived. This
chapter reviews historical precedents and theories of consumer behaviour to explore
whether recovery will be different this time round, especially given the possible habit
breaking effects of online substitutes, and political expediency of reducing causes of
climate change.
Keywords Tourism. Travel. COVID-19. Festivals. Virtual tourism. Climate change.
Summary 1 COVID-19 - A Crisis for Travel and Tourism. – 2 Which Tourism Pioneers Will
Lead the Return? – 3 Reality or Virtual Reality? – 4 Festivals Have Been a Growing Sector
Within Tourism. – 5 Business Tourism. – 6 Green Dividends. – 7 Reinvention.
1 COVID-19 - A Crisis for Travel and Tourism
Tourism has suffered more than most sectors from the COVID-19 pandemic.
The World Travel and Tourism Council (WTTC 2020) reported that in 2019,
the last full year before the pandemic, the travel and tourism sector global-
ly grew by 3.5%, outpacing overall economic growth of 2.5%. This pattern of
tourism growth outpacing general economic growth had also occurred in the
9 preceding years. By 2020, WTTC estimated that the sector accounted for
10.3% of global GDP and 330 million jobs, or 1 in 10 jobs around the world.

ISBN [ebook] 978-88-6969-442-4
Open access 341
DOI 10.30687/978-88-6969-442-4/027
Adrian Palmer
Travel and Tourism. At the Frontline of COVID-19
The concept of a lockdown, brought on by COVID-19, caused instant

harm to the sector, making its impact one of the most immediate and
severe of any sector. Condé Nast reported that on 7 April 2020, the
total number of U.S. air passengers recorded by the Transportation
Security Administration (TSA) fell below 100,000 for the first time in
the agency’s history – a 95% drop compared to the passenger num-
bers on the same day one year earlier. Over half of the world’s air-
craft fleet was parked up, costing the world’s airlines an estimated
$1.6 billion of lost revenue per day (Condé Nast Traveler 2020).
Inconvenient or annoying to those denied their holiday, lockdown
was devastating to communities dependent on tourists’ spending.
Hotels worldwide closed and some tourist resorts resembled ghost
towns, at a time when they should have been buzzing with tourists
spending their money. Governments throughout the world intervened
with measures to support the sector, especially to counter the social
consequences of unemployment, and to preserve supply side flexibil-
ity for when the travel and tourism sector got back on its feet again.
But as we start thinking about the post-COVID-19 world, ques-
tions have been asked about what the recovery would look like for
the tourism sector. A crisis invariably creates opportunities as well
as challenges. New forms of virtual substitutes for tourism have ap-
peared. Climate change protesters have celebrated the temporary
banishing of aircraft from the skies and saw COVID-19 as a timely
opportunity to fix the causes of global warming. Questions were be-
ing asked about the process of recovery in the sector. It was easy to
impose a lockdown, but much more difficult to manage a return to
normal. Indeed what would be the new normal? There has been a lot
of crystal ball gazing, but if we draw on fundamental research about
consumer behaviour, and reflect on historical precedents, we might
get a better picture.
2 Which Tourism Pioneers Will Lead the Return?
Tourism will not one day suddenly be switched back on. Tourism
will have to re-launch itself, and history tells us that most product
launches see buyers segmented into groups of pioneers, early adop-
ters, through to the laggards who will only adopt when everybody else
has. Pioneers have always been a feature of tourism – for example the
first to visit warfare zones after a ceasefire and the eager pioneers to
be the first ‘space tourists’. All eyes will be on the pioneers to kick-
start the tourism revival. Way behind them will be a mass-market
of people who only venture out if everybody else in their peer group
is doing so. Many research studies have demonstrated the power of
peer group reference in making purchase decisions. So it may take
more than the lifting of travel restrictions to entice fearful people
Adrian Palmer
back, and will need the perception that other people like them are
going on holiday. The most difficult thing to predict here is individ-
ual’s perception of fear – of becoming infected, or of being stranded
away from home in a new lockdown. There may be unintended con-
sequences here which are difficult to predict. ‘Social distancing’ to
keep people apart, the use of face masks and the ubiquity of saniti-
sation stations may be medically correct, but may reassure and cre-
ate perception of fear in equal measure.
3 Reality or Virtual Reality?
Every big downturn in tourism leads to predictions that the sector

will never be the same again. Dire predictions were made after 9/11,
however most indices of tourism are now well above pre-9/11 levels
(US Bureau of Transportation Statistics 2005). “But it is different
this time round’ is a common repost. This time, greater use of the In-
ternet has been claimed to reduce the need for travel. During lock-
down, consumers have been forced to break habits and learn to use
new video communications, but will these bring about a long-term
change in tourism habits?
The tourism literature has for a long time explored the reasons
why people travel. Essentially there are push and pull factors at
work. Pull factors relate to the inherent attractiveness of a destina-
tion – sunshine, scenery, access to friends and relatives, etc. Push
factors represent a desire to escape the confines of current life con-
straints and to live – temporarily at least – an alternative life. A few
days sightseeing in a historic city can be a welcome escape from the
tedium of everyday life. But can online tourism provide such escape?
In fact, video portrayal of tourism can be both a substitute and
a stimulus to seek the real thing. We have been here before. When
colour television first appeared and people could enjoy the sights of
an African safari from their armchair, the question was asked why
would people need to go there? But seeing it on television evoked de-
sire to see the real thing, and instead of being a substitute, televi-
sion encouraged more people to go on a real safari. Many films and
television soap operas have similarly evoked desire to go and see the
film location, or a recreation of the film set. Simulated tourism using
artificial intelligence may allow us to imagine that we are walking
the streets of Paris or New York but, based on historical precedent,
the virtual experience may lead us to seek the authentic real thing.
Customer experience and authenticity have become two big driv-
ers of consumption. Customer experience is often defined in terms
of the memorability of an event. Tourism on a video screen can only
ever be two-dimensional – sound and sight, with none of the smell,
taste or touch of actually being there. So online only has two dimen-
Adrian Palmer
sions for creating memories, compared to five in real life. Consum-

ers seek out more authenticity as they get wealthier, whether it is au-
thenticity in their music, choice of yoghurt, or tourism experiences.
This is unlikely to change, so the quest for ‘authentic’ tourism expe-
riences will continue. Of course, in an increasingly crowded world of
tourism, and diverse media images, it can be debated how tourists
construct their idea of authenticity.
Another emerging question, especially for millennials, is the dis-
tinction between reality and virtual realities. In a world where an
individual’s work and leisure life is largely spent online, real-world
experiences can stand out as a point of difference. So in a world of
streamed music, a music festival is a point of difference in life. One
of the reasons for recent growth in book festivals may be a desire to
bring e-books to life. For an Instagram generation, ‘being there’ of-
fers an additional sense of identity and group leadership, reinforced
by powerful images sent to followers. Again, we see the paradox of
virtual realities feeding tourism demand for the real-life tourism re-
lated experiences.
4 Festivals Have Been a Growing Sector Within Tourism
Festivals are a growing generator of tourism business. They are es-

sentially a coming together of people with a shared interest. We can
learn a lot from sociology about the way in which being a member of
a group reinforces an identity, distinguishing a ‘tribe’ of festivalgo-
ers who are the ‘in-crowd’ from everybody else who is ‘out-crowd’.
Festivals often involve travel away from home to be with like-minded
people, whether it is camping out and sharing music at a music fes-
tival, or sharing a love of books at the growing number of book fes-
tivals. The Association of Independent Festivals (AIF 2018) has esti-
mated that audiences at AIF Member festivals spent more than £386
million in 2017, with £34.7 million of that being spent in the local area
of the festival they attended. The average festivalgoer spent £483.14
while attending a festival, leading to local economic suffering where
festivals were cancelled due to the COVID-19 pandemic.
Festivals have also put online delivery to the test – is an online
format of a festival a substitute or a complement for the real thing?
Festivals which had to cancel their summer 2020 events have devel-
oped imaginative ways of keeping in touch with their followers, in-
cluding live streaming of book and music festivals and interactive
presentations by science festivals. Festivals that have gone online
have made either no charge or only a nominal charge – the main ob-
jective has been to retain the loyalty of followers and retain a dia-
ry slot for the following year. Organisers have realised that it would
be very difficult to charge anything like the normal attendance fee
Adrian Palmer
for a virtual festival – there is so much free material available online

and high charges for an event low in experiential quality may alien-
ate loyal followers.
Online formats of festivals are probably here to stay. But with-
out the experiential qualities of face-to-face, they will probably on-
ly ever be complementary. A challenge for organisers is that having
a high quality, creative online presence may now have become a ba-
sic expectation of followers who – after the creative adaptations as-
sociated with COVID-19 – may not be happy with the previous status
quo of a basic static website. This follows a pattern in many service
sectors where online has not replaced face-to-face, but created du-
plicated and complementary routes to customers which must both
be supported with investment. How should festivals build online in-
to their business models? What will the business models of festivals
look like in the ‘new normal’?
5 Business Tourism
Business tourism is an increasingly important source of tourism rev-

enue, and conference delegates often use resorts to fill off-peak ca-
pacity. With so many now using Zoom conferences, surely demand for
business tourism will fall sharply post-COVID-19? This is certainly
not a foregone conclusion, and the law of unintended consequences
may again kick in here. In the early days of the Internet, many pre-
dicted that commuting would decline as people worked from home
and didn’t need to travel to the office. In fact, working from home
wasn’t a binary home or office choice, but most people typically work
part of the time at the office and part at home. If you only need to go
to the office twice a week, it doesn’t matter too much if you live a lot
further away, so commuting distances increased with the appearance
of the long-distance commuter. Could something similar happen post-
COVID-19? It is quite likely that more people will work from home.
But this may spur a need to bring teams together face-to-face so that
they can better identify as a team. And with office space cut back,
meeting space may be hired in from hotels and conference centres.
This is following a well-trodden path, with many conference facilities
already filled with salespeople and other professionals who work from
their homes scattered through the country, and who meet for regu-
lar team meetings at centrally located hotels and conference centres.
We even need to challenge the assumption that business tourism
involves a cognitive, rational decision process, and will therefore be
replaced by Zoom meetings. Business travel may be important to in-
dividuals’ self-esteem and self-image, and may be a status symbol
which business people will fight to preserve, regardless of the ra-
tional benefits of doing business through videoconferencing. The end
Adrian Palmer
of business tourism has been predicted before, but it remains to be

seen whether this time round the combined effects of climate change,
lingering virus dangers and greater familiarity with online confer-
encing will encourage firms to eschew the emotional appeal of the
face-to-face meeting and instead opt for the cost saving and socially
responsible videoconferencing option.
6 Green Dividends
The other great change in tourism ‘this time round’ is the spectre of
climate change. Restricting international travel through COVID-19
may have been disastrous for some tourism communities, but has
helped to delay climate change. Will this forced interruption to trav-
el break habits and focus peoples’ spending away from long-distance
tourism to other leisure activities which are more benign to the plan-
et? This prospect is in itself unlikely.
There has been a lot of research showing holidays being high on
households’ lists of spending priorities, for example the ABTA Holi-
day Habits report in 2019 suggested a growing commitment by UK
consumers to spending money on holidays, despite a problematic
economic outlook (ABTA 2019). There has been much reported hy-
pocrisy of climate campaigners using planes to travel in what they
admit would be a harmful way. This is symbolic of a cognitive disso-
nance between peoples’ need to enjoy the benefits of tourism, yet at
the same time feel inwardly calm and socially accepted in their sup-
port for measures to limit climate change. The tourism sector has
been quite astute in tackling this cognitive dissonance. Flying with
an airline which uses the most fuel-efficient aircraft and paying to
plant trees to offset carbon emissions provides a clear conscience for
those who feel guilty about travel.
The great expansion phases in long-distance leisure tourism have
been associated with big reductions in the cost of travel – easyJet’s
early promise of a flight to the Mediterranean for less than the price
of a pair of jeans opened new markets for tourism. In the immediate
post-COVID-19 scenario, costs of flying are likely to be increased,
caused by restricted supply from airlines who have closed down,
and possibly lingering measures to reduce the spread of the virus.
Cost – including measures to address climate change and virus limi-
tation – is likely to drive or constrain long-distance tourism. And gov-
ernments may have been emboldened by COVID-19 to further help
reduce climate change. Simply not bailing out the airline sector may
restrict supply and raise prices, without much cost or effort by gov-
ernments. Governments may also see the break in consumers’ habits
as an opportunity for driving through environmental changes which
increase the costs of tourism. Demand for long-distance tourism is
Adrian Palmer
more likely to be influenced by its cost than a general sentiment to-

wards climate change.
7 Reinvention
Tourism has had a habit of reinventing itself over many decades.

COVID-19 will not destroy it, and if we look at historical precedent,
it is unlikely to dampen long-term demand. Fear and cost may in the
short-term restrict the resumption of long-distance tourism, and a re-
invigorated ‘staycation’ may lead the way. Climate change may pose
a short- to medium-term challenge to the sector, possibly buoyed by
experience with the COVID-19 closedown of the sector. But in the
longer term, tourism has shown its capacity to adapt. Fear of travel
may be a short-term constraint, but in the longer-term, falling costs
of new climate friendly travel technologies may help to reinvent the
sector again. And in an online world in which consumers seek great-
er authenticity, constant images of faraway places are likely to fur-
ther stimulate demand for travel, rather then replace it.
Bibliography
ABTA (Association of British Travel Agents) (2019). ABTA Holiday Habits report
2019. London: ABTA.
AIF (Association of Independent Festivals) (2018). 10 Year Annual Report 2008-
2018. London: Association of Independent Festivals.
Condé Nast Traveler (2020). Coronavirus Air Travel: These Numbers Show the
Massive Impact of the Pandemic. https://www.cntraveler.com/sto-
ry/coronavirus-air-travel-these-numbers-show-the-massive-
impact-of-the-pandemic?verso=true.
US Bureau of Transportation Statistics (2005). Airline Travel since 9/11. htt-
ps://www.bts.gov/archive/publications/special_reports_
and_issue_briefs/issue_briefs/number_13/entire.
WTTC (World Travel and Tourism Council) (2020). Economic Impact Reports.
https://wttc.org/Research/Economic-Impact.


J. James Reade
Carl Singleton
Abstract The European football industry has suffered an unprecedented shock from
COVID-19. In this chapter, we reflect on how the sport’s administrators responded to the
initial outbreaks and what lessons can be learned. We also look ahead to what football
in the post-COVID-19 era could look like. We conclude that this largely depends on the
decisions now facing the sport’s administrators and the powerful owners of the biggest
football clubs: will they prioritise football as the inclusive and diverse game, at the heart
of local communities? Or will their intrinsic financial interests dominate?
Keywords Soccer. Sports Economics. Sports Finance. Coronavirus. Sports Management.
Summary 1 Introduction. – 2 Finishing the 2019-20 Season. – 3 How Could Football

be Different in the Post-COVID-19 Era? – 4 Concluding Remarks.
1 Introduction
A deadly airborne virus means social distancing and threatens the entire
business model of European professional football – sport normally involves
large gatherings of people, where an airborne virus can spread.1 Following
the outbreak of COVID-19, by April 2020 practically all major professional
sports had ground to a halt worldwide. Football leagues were suspended, ei-
1 See Stoecker, Sanders, Barreca 2016 and Cardazzi et al. 2020 for evidence from North Amer-
ica that sports events can increase the mortality from influenza in local areas. See Parnell et al.
2020 for a discussion of the implications of COVID-19 for mass gatherings and major sports events,
such as the previously planned 2020 UEFA European Championship.

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J. James Reade, Carl Singleton
ther by themselves or by governments, from the elite level, normally

played in front of tens of thousands of fans, to the bottom levels, or
‘grassroots’, played on local parks and recreation grounds.
Football has become an economically important business. In 2018-
19, the twenty highest earning football clubs in the world, all in Eu-
rope and eight of them in England, generated a combined income of
€9.3 billion (see Deloitte 2020). The growth in European football over
the past three decades has been remarkable. The most prosperous
league over that period, the English Premier League (EPL), had broad-
cast rights for 2019-22 valued at £9.2 billion, with around 46% of that
from overseas (see Svenson 2019). Figure 1 shows how the value of
the domestic TV rights for the English Premier League increased from
£61 million per season in 1992 to £1.7 billion by 2016 [fig. 1].
In this chapter, we discuss how this growth industry has been af-
fected by the COVID-19 global pandemic. First, we summarise how
European football responded to the initial shock and disruption caused
by the outbreak, mainly focusing on what happened in England. Sec-
ond, we contemplate how football and its business could be different
in the post COVID-19 era. Finally, we offer some concluding remarks,
suggesting that the immediate future of European football very much
depends on the vision and priorities of its principal decision makers.
2 Finishing the 2019-20 Season
As COVID-19 spread globally, sports events that could be postponed

were postponed, e.g. the Summer Olympic Games and the UEFA Eu-
ropean Football Championship. Annual events that couldn’t be post-
poned were cancelled, e.g. the The Championships, Wimbledon, the
Boston Marathon and the Formula One Australian Grand Prix.
The wrangling that took place in the suspended European football
leagues during the spring of 2020, concerning their resumption or
otherwise, has made clear that the two most fundamental influenc-
es are government and money.2 In France and the Netherlands (both
countries with a rich footballing heritage), the football seasons were
cut short due to the intervention of the respective governments. The
bans on sports in these countries reached far enough into the sum-
mer that a resumption would be impractical, without affecting the
start of the next season.
2 Safety played a role too, primarily affecting the timing of resumptions though,
rather than the decision between cancelling and continuing. In the immediate weeks
around the peak levels of infection, leagues determined that they could not justify us-
ing scarce national COVID-19 testing resources to ensure the virus was not spread-
ing among the players and other people involved in putting on football matches, even
if they were resolved to return.

Figure 1 Nominal value of domestic broadcast rights for the English Premier League 1992-92 to 2021-22;
author calculations using SportsBusiness Media Rights Tracker, accessed May 2020
Other seasons were cut short, such as in the English lower leagues,
arguably because the decision makers were able to impose particu-
lar outcomes (usually applying points per game before the season was
suspended), to determine the champions, promotion and relegation,
without fear of significant adverse financial repercussions from le-
gal action.3 Between 2012 and 2015, a club relegated from the EPL,
in the best case, suffered a £20 million loss in revenue, and, in the
worst case, £50 million.4 Conversely, the minimum revenue gain to a
club from promotion to the EPL in this period was £33 million, and
the maximum gain was £76 million. Because of these large sums in
English football that depend on the outcome of a season, the EPL and
the EFL Championship, the second tier, could not be decided in 2019-
20 by some arbitrary measure, or even a forecast of likely outcomes.
The financial model of football in Europe, but especially in Eng-
land, has changed dramatically in the last thirty years, following
the formation of the EPL as a breakaway from the English Football
League. In 1990, average revenues within the English Fourth Divi-
3 Although not all leagues have avoided this issue. Heart of Midlothian F.C. have begun
legal action against the Scottish Professional Football League after they were relegat-
ed from the top division when it was cut short (https://www.theguardian.com/foot-
ball/2020/jun/15/hearts-legal-action-spfl-relegation-scottish-premiership).
4 These and the following financial values are author calculations using the annu-
al reports filed by football clubs at Companies House, the UK’s registrar of companies
(https://www.gov.uk/government/organisations/companies-house).

sion (now League 2) were 12% of those generated by clubs in the

First Division (now EPL). But in 2015 the equivalent figure was 2%.
Football has operated on a professional basis for almost a century
and a half, and yet at no point in that time has a set of circumstances
arisen such as those imposed by COVID-19, where it was financial-
ly unviable, and in some cases legally impossible, to complete sea-
sons. One lesson from the crisis is that a set of revised rules and reg-
ulations regarding the cutting short of seasons is required. Sports
leagues will need procedures in place that determine the exact meth-
od by which a season will be cut short, if a particular threshold of
matches has been played, or will instead be abandoned, if too few
have been played.5 If it is known in advance that points per game,
weighted or otherwise by other factors (e.g. goals scored, home or
away form, uncertainty), will be used to decide the season outcomes,
then leagues can be cut short without fear of legal repercussions.
The increased concentration of money at the top of the game has
had significant impacts further down the leagues too, since little of
the revenues coming into the game make their way down to the grass-
roots level. Liberalisation of football’s labour market has resulted in
a larger proportion of immigrant labour at the top of the game over
the years, rather than local players making their way up the leagues
(see for example the Taylor 2007). Opportunities for local young men
and women to succeed in the game are reduced. In England, the Foot-
ball Association has responsibility for the grassroots, and, along with
many small town and village clubs, it has lost out on significant sourc-
es of revenues in the summer of 2020 because of COVID-19. Festi-
vals on football pitches and music concerts at stadiums are not only
part and parcel of the British summer but also the financial viability
of football outside the elite levels.6 These patterns are not unique to
English football. Without substantial support from governments or a
fairer redistribution of wealth in the football pyramid, it seems un-
likely that the rich ecology of association football, down to its grass-
roots, with all its attendant mental and physical health benefits, will
look the same post COVID-19.
3 How Could Football be Different in the Post-COVID-19 Era?
The future of European football in the post-COVID-19 era largely de-

pends on how soon it will be safe for the fans to return to stadiums,
and whether they will come back. To the best of our knowledge, there
5 This happened with the 1939-40 season in England, abandoned after only 3 matches.
6 In June 2020, England’s Football Association announced 124 job losses and expect-
ed losses of £300 million (see https://www.bbc.co.uk/sport/football/53222021).

is not yet any conclusive evidence regarding how easily the virus is
transmitted at a large outdoor public gathering such as in a sports
stadium.7 But regardless, common sense in the ongoing public health
emergency dictates that fans should not be returning soon.
A vast literature has looked at the effects of crowds on football
match outcomes (e.g. Garicano, Palacios-Huerta, Prendergast 2005;
Buraimo, Forrest, Simmons 2010). Along with the familiarity of play-
ing at home and the fatigue from travelling away, the impact of the
home crowd has been suggested as a factor in accounting for the sub-
stantial home advantage in professional team sports (Schwartz, Bark-
sy 1977), i.e. teams tend to win more often when playing in their own
stadiums. Two studies of the rare instances when professional Euro-
pean football was played behind closed doors, before COVID-19, have
found evidence that home advantage was disproportionately eroded
in these matches (Pettersson-Lidbom, Priks 2010; Reade, Schreyer,
Singleton 2020). Figure 2 describes the differences between matches
with fans and without in the latter of these studies, showing that on
average the normal home advantage was approximately wiped out,
accounted for by fewer goals scored by home teams [fig. 2]. Referees
also punished players on the away teams significantly less without
the pressure from the crowd. However, these results were generally
based on one-off games behind closed doors. It is not clear whether
they were driven by the familiarity factor rather than reduced refer-
ee bias. Further, rules have been changed for the football which has
returned since COVID-19, such as an increased number of substitu-
tions, which could also plausibly affect match outcomes.
Nonetheless, it has been widely noted that home advantage has not
only disappeared but even reversed in the first major European league
to complete its domestic season.8 In the German Bundesliga geister-
spiele (ghost games), from the post-COVID-19 resumption up to the end
of the 2019-20 season, home teams won just 32% of the matches played
(26 of 82, compared with 43% in the same season before March). Away
teams, however, won 45% (37 of 82) of the post-shutdown matches,
compared with 35% in the season beforehand. Figure 3 summarises
the trends of home advantage in professional football since 1890, as
well as what has happened generally since the European virus-induced
social lockdowns [fig. 3]. When football returned behind closed doors in
May, home advantage looked to have disappeared, but this has partly
7 There is some preliminary evidence from North American Sports that the different
severity in local areas of the initial US outbreak was related to sports events. Aham-
mer, Halla and Lackner (2020) found that NBA (basketball) and NHL (ice hockey) games
in early March 2020 significantly increased the rate of COVID-19 confirmed cases and
deaths by the end of April 2020 in the areas surrounding the venues.
8 See for example ESPN, 9th June 2020 (https://www.espn.co.uk/football/german-
bundesliga/story/4107639/).

Figure 2 Differences in sample means of football match outcomes: closed doors vs with fans,
2002-03/2019-20. Uses all matches in the UEFA Champions League, Europa League, Italian Serie A, Serie B,
Serie C, Coppa Italia and French Ligue 1 since the beginning of the 2002-03 season. SOT is Shots on Target.
See details in Reade, Schreyer, Singleton 2020
recovered throughout June, perhaps as teams have become more fa-

miliar with the lack of fans in their stadiums.
Why does home advantage matter in football? Home advantage
ensures that a weak team in its own stadium has a good chance of
beating a strong visiting team (Forrest et al. 2005). If the reduction
in home advantage without fans is greater for weaker teams, then
stronger teams will win more often, and the competitive balance of
leagues will be reduced. Studies have found that the demand for foot-
ball on television is increased by the uncertainty of the match outcome
(e.g. Buraimo, Simmons 2009; Cox 2018; Schreyer, Schmidt, Torgler
2018a, 2018b). This suggests that TV audience demand for European
football could be affected if matches remain behind closed doors. Re-
duced home advantage should increase the attractiveness of matches
featuring a strong home team and a weak away team, and vice versa
when those relative strengths are reversed. In addition, there could be
a second effect on demand, as changes in home advantage that are not
equally distributed over team strengths would tend to affect the com-
petitiveness of overall league championships and the interest of fans.
It is also not clear that matchday revenues will recover quickly
when fans can return to stadiums. One argument is that there will
be a pent-up demand effect, that could offset or override the nega-
tive demand effects from any ongoing risk of COVID-19 infection. Two
of the most sustained attendance increases in the history of English
Figure 3 Professional football result outcomes since 1890 (left panel), and between January 2016 to June 2020
(right panel). H refers to home wins, D refers to draws and A refers to away wins. Uses all matches in the top leagues
of 108 countries or regions since 1890, 82 countries since January 2016, and 29 in May and June 2020.
Author calculations using https://www.worldfootball.net/
football came after the suspensions brought about by each World War
(e.g. Dobson, Goddard 1995). But this is a tentative parallel at best.
Reade and Singleton (2020) found that in the initial stages of the Eu-
ropean COVID-19 outbreak there were already substantial negative
demand responses, suggestively because of the implied risk of infec-
tion, even when the significance of the disease and its implications
were being widely played down.
The elite European football clubs are likely to survive the outbreak
financially, given their continued access to substantial funds besides
match-day gate receipts. But professional football below that level
still relies on ticket revenues. By studying the 2018-19 accounts of
professional football clubs in England and Wales, Szymanski (2020)
found that the majority of these businesses were already on the verge
of insolvency before the loss of revenues and write-down of assets,
i.e. player valuations, due to COVID-19.9 If the present structures of
professional football are to survive, then some consolidation will be
needed. Szymanski (2020) notes that much of football club debt is
owed to other clubs, in the form of delayed player transfer payments.
Therefore, if any club goes bankrupt it has knock-on effects for oth-
ers, both domestic and foreign, potentially leading to financial conta-
gion. He suggests that the consolidation of the national football busi-
ness model should involve assigning the valuable future broadcast
rights from the top league to a collective fund, from which those un-
able to collect unpaid debts can make claims, including for delayed
transfer fees and player wages. In other words, the only way to save
9 This research was presented at the Reading Online Sport Economics Seminars
(ROSES) on 17 April 2020. See here for a public recording: https://www.youtube.com/
watch?time_continue=4006&v=viPqe93rW2c&feature=emb_logo.

the existing professional football pyramids today is to leverage the

future value of football after COVID-19.
The financial pressures facing most firms in the European football

industry will be acute unless drastic collective actions are taken.
The benefactor club owners have deep but not bottomless pockets,
nor endless patience. Major football clubs and national associations
will need to prioritise their resources. The women’s game has been
an area of substantial growth in participation and interest in recent
years.10 Given the potential for further growth in this area and oth-
ers, football’s decision makers could find opportunities within any
consolidation. By diverting some of the resources held by the pow-
erful elite leagues, which currently feather superstar players’ nests
and tickle billionaire owners’ egos, such as in the EPL, they could
make longer-term investments in the health of the European football
industry. The football labour market is also overdue for reform. In
the 2019-20 season, EPL clubs paid £263 million in fees to the agents
representing players.11 The influence of these agents should be cur-
tailed, as it represents next to nothing in added value to the sport,
but sees large sums of money exiting it, which could be used to prop
up the rest of the pyramid and invest in the women’s game. Given the
public good that football can deliver, in terms of public health and
social cohesion, there may be a case for state intervention, not only
to support the industry financially but also to force a re-evaluation
of whom the beautiful game ultimately serves.
10 For example, in England, 11.7 million watched England’s defeat to USA at the 2019
FIFA Women’s World Cup, compared with a peak of 2.4 million four years before in the
previous World cup (see https://www.theguardian.com/football/blog/2020/jan/02/
womens-football-decade-of-progress-2020).
11 See for example BBC Sport, 24 June 2020; https://www.bbc.co.uk/sport/foot-
ball/53170215.

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Part 12
Politics: Protectionism and Populism
359
Why Collaboration Needs

to Win Over Protectionism
Benjamin Laker
Abstract The COVID-19 virus is severely affecting international trade, creating a nega-
tive fiscal outlook. Consequently, the global economy is receiving its sharpest reversal
since the Great Depression. As such, we are seeing several countries invoke restrictions
or taking action to secure medical supplies. A by-product of this is protectionism. One
should worry most about developing countries without any domestic suppliers, who
also need critical medical supplies, and who will be locked out, and not access essen-
tial equipment, medicines, and basic foodstuffs because of export restrictions set by
developed nations. Therefore, collaboration is needed more than ever to ensure eco-
nomic and societal prosperity throughout the world, rather than within a small number
of isolated, prosperous regions.
Keywords Informal economy. Protectionism. Trade. Xenophobia. Collaboration.
In response to the coronavirus crisis, there are many examples of co-oper-

ation and collaboration, from communities coming together to Clap for Car-
ers in the UK to Federal Reserve loans to other central banks. But in emo-
tive, uncertain times, the instinct to wind up the drawbridge and look after
your own is strong and playing out across societies, nations, and communi-
ties. The pandemic is politicising travel and migration and driving self-reli-
ance and protectionism. Some view this as a much-needed retraction from
the upper limits of globalisation, shortening supply chains, and reducing ex-
posure to risk in an unstable world. Others fear a dampening down of trade
will leave economies vulnerable and heighten instability, leading to more risk
aversion and inward focus.
A particular issue concerning the informal economy is intangibility: things
which are not measured are not known to legislators, meaning, unfortu-

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Benjamin Laker
nately, that over two billion workers from the informal sector, are
threatened. Narula (2020) suggests that those affected account for
70% of employment in the Middle East and North Africa, and 80%
in both South Asia and sub-Saharan Africa (ILO 2020). Somewhat
concerningly, these people will, according to Narula (2020) not re-
ceive government aid in relation to the COVID-19 pandemic. For ex-
ample, within the nation of India, 63 million micro-enterprises repre-
sent 99% of all enterprises and comprise 107 million people – who are
not known to legislators because they are unregistered. As a result,
they are not accounted for on government data – though the number
may be closer to 300 million (Jayaram et al 2020).
The COVID-19 pandemic has sparked a radical reordering of busi-
ness ecosystems, suggest several business historians, such as Rita
Trehan, CEO of global transformation consultancy Dare Worldwide
(Laker et al. 2020). She considers the need for a collaborative ap-
proach to be crucial to success when new networks are built as lock-
down eases. But these networks should look to contain within them,
informal workers because businesses, both foreign and domestic, are
responding to the slowdown by reducing employment, hence there
will be a sharp upwards increase in those below the poverty line.
Narula (2020) suggests that informal workers typically live from
hand to mouth. This means that, without paid work, a person cannot
purchase essential supplies such as food – let alone apparent desirables
such as medication. One recent example of this transactionary relation-
ship occurred within India, where earlier this year, millions of informal
workers walked home from big cities to return to ancestral villages.
Even if the pandemic subsides concludes Narula (2020), it is naive to
believe activities can ever return to their pre-pandemic state. Economi-
cally weak countries will already have suffered from declining revenues
from almost all sources, also as the pandemic raises emergency spend-
ing to mitigate the immediate challenges. Countries dependent on pri-
mary sector exports are notoriously volatile, especially in the extrac-
tive sector. Other primary good exports will likely be affected not by
price volatility, but due to logistical challenges and restrictions, while
imports are likely to cost more. The reduction of fiscal performance may
lead to an increase in borrowing and, most certainly, a requirement
for aid. There will be a number of nations that rely heavily upon remit-
tances for their foreign exchange (Narula 2020). As a result, these na-
tions will quite likely suffer a shock: Arabic counties will consider re-
turning their migrant workers, who are primarily engaged informally
and in receipt of limited, sometimes nonexistent labour rights, both at
home and abroad, to their home countries (Narula 2020).
That being said, there is an immediate short-term opportunity
from the COVID-19 pandemic. With items from ventilators to masks
in seriously short supply and prices soaring, those trying to source
goods complained of a bidding war with other buyers, involving a
Benjamin Laker
web of brokers and suppliers. Shipments destined for multiple coun-

tries were diverted elsewhere – often to the US ILO (2020). German
officials accused the US of ‘confiscating’ a consignment of respira-
tors en route from China to the Berlin city police during a stopover
in Bangkok ILO (2020).
There is somewhat of a critical opportunity for developing nations
to enable and even support informal workers to help contribute to
the gap of supply. This could occur through subsidies provided to lo-
cal suppliers to help maintain import prices. One striking example
that has already implemented such a concept is apparent within the
global shortage of personal protective equipment for hospitals (Naru-
la 2020). Medical institutions are struggling to acquire specialist
items because prices the world over have increased. As a result, many
small enterprises are beginning to manufacture and sell items local-
ly, and in some cases, the central government holds the responsibil-
ity for sterilising and deep cleaning the final product (Narula 2020).
It is not just the US that has veered into protectionism. Accord-
ing to the Global Trade Alert team at Switzerland’s University of St
Gallen, 75 countries have introduced some export curbs on medical
supplies, equipment, or medicines this year (ESCAP 2020). They in-
clude most EU countries, India, China, Brazil, and Russia. But the
team also found that 79 countries have liberalised trade in medical
supplies this year. Clearly, governments and public authorities have
a duty to show responsibility and restraint when it comes to facili-
tating the flow of supplies, treatments, and testing equipment need-
ed to tackle the coronavirus beyond their borders.
So how will global co-operation play out as lockdown eases? The
danger is that the movement of people, goods, and capital curtailed
during lockdown is all in danger of being politicised by agendas that
existed long before the crisis hit. Regarding the movement of peo-
ple, the Trump administration used the pretext of the ‘Chinese virus’
to curtail immigration further, arguing that jobs should go to Ameri-
cans instead. He will likely be able to maintain anti-immigration poli-
cies long after the virulent phase of the epidemic because public con-
cerns will make it easier for him to retain them.
In an atmosphere of mistrust and suspicion, there has been an
increase in displays of xenophobia against Chinese and East Asian
persons in many countries across the world, fuelled by provocative
newspaper headlines like ‘Yellow Alert’ (France) and ‘China Kids Stay
at Home’ (Australia). Indian health authorities have campaigned to
spread awareness that not all people who are from China have COV-
ID-19. Pointing the finger and blaming other ethnic groups for the
disease is one response. But public opinion on immigration is often
more nuanced than politicians give people credit for. In Europe, the
crisis has highlighted the reliance societies have on informal work-
ers in food production and the care system, with many risking their
Benjamin Laker
lives during the crisis. It is becoming harder than ever to see the
world in black and white.
International tourism is set to plunge by 80% this year, but some
regions will recover more quickly than others. Less developed coun-
tries will be hit particularly hard, but experts say this is an opportu-
nity to rebuild the industry to be more sustainable. Countries with
pre-existing links and similar health protocols are coming together to
create ‘travel bubbles’ as lockdown eases. Australia-New Zealand, Tai-
wan-Singapore and Greece-Cyprus-Israel are looking to collaborate
and set up safe tourist zones to allow movement between countries.
In terms of the flow of capital, the crisis will accelerate an already-
existing trend of financial de-globalisation. State ownership of pri-
vate companies is on the increase, with the nationalization of Italy’s
airline, Alitalia, the UK government taking control of rail companies,
and Spain nationalizing all of its hospitals and healthcare providers
to combat the spread of the virus. Nations looking inward are seek-
ing to shorten their supply chains and decrease reliance on overseas
manufacturing. The global trade system that has dominated the world
for decades is under threat from protectionist thinking, with WTO
predicting that world trade could reduce by up to a third (Joyce, Xu
2020). Economists argue that the way to make supply chains more re-
silient is not to domesticate them but to diversify them ESCAP (2020).
More than ever, there is a need for firms to cultivate adaptive – rath-
er than hierarchical – structures that support rapid change, refocus-
ing, and reallocation of resources. Those organisations that can lever-
age their network and work together will come out ahead as lockdown
eases. There is a need to integrate data from a wide range of sourc-
es to innovate and connect. Those companies that are in touch with
their core purpose beyond making money will have better clarity on
the way forward.
The coronavirus crisis has shown that the global economy’s gov-
ernance is made up of international institutions and informal col-
laborations that are shaped by individual nations’ willingness to co-
operate. For the sake of the world’s economic and physical health,
collaboration needs to win over protectionism.

Benjamin Laker
Bibliography
ESCAP (Economic and Social Commission for Asia and the Pacific) (2020). The
Impact and Policy Responses for COVID-19 in Asia and the Pacific. https://
bit.ly/2ZK4X6h.
ILO (International Labour Organization) (2020). ILO Monitor 2nd edition: COV-
ID-19 and The World of Work: Updated Estimates and Analysis. https://
bit.ly/2WFR72V.
Jayaram, K.; Leke, A.; Ooko-Ombaka, A.; Ying, S.S. (2020). “Finding Africa’s
path: Shaping Bold Solutions to Save Lives and Livelihoods in the COVID-19
crisis”. McKinsey Institute, 17 April. https://mck.co/2OITwp7.
Joyce, R.; Xu, X. (2020). “Sector Shutdowns During the Coronavirus Crisis:
which Workers are Most Exposed?”. Institute for Fiscal Studies Briefing Note
BN278. https://doi.org/10.1920/BN.IFS.2020.BN0278.
Laker, B.; Cobb, D.; Trehan, R. (2020). “Too Proud to Lead: How Hubris can De-
stroy Effective Leadership and What to Do About It”. Bloomsbury.
Narula, R (2020). “Policy Opportunities and Challenges from the Covid-19 Pan-
demic for Economies with Large Informal Sectors”. Journal of International
Business Policy. https://doi.org/10.1057/s42214-020-00059-5

The Political Implications

of COVID-19
What Now for Populism?
Daphne Halikiopoulou
Abstract This chapter briefly examines the political implications of COVID-19, focus-
ing on the potential constraints and opportunities it poses for populism. Some initial
comparative observations suggest the following patterns. First, populists in opposition
are likely to be weakened electorally in the short-run, as voters support non-populists on
the basis of valence voting. Second, this may not apply to populists in power, who may
use emergency measures for democratic backsliding. Third, in the long-run, a potential
economic crisis as a result of the pandemic may benefit populist parties, especially those
in opposition as discontent voters may punish those in government for the poor manag-
ing of the health/economy trade-off. In sum, what will determine the direction of future
political developments is the extent to which governments can balance the trade-offs
involved in the COVID-19 crisis, including effective health management versus economic
growth and individual freedoms versus collective security.
Keywords COVID-19. Populism. Far right parties.
Summary 1 Introduction. – 2 COVID-19 Trade-offs. – 3 What Now for Populism? –

4 Conclusion.
1 Introduction
The exponential spread of COVID-19 in early 2020 placed governments around

the world under severe strain. Despite the global reach of the virus, nation-
states responded primarily as individual actors, seeking to contain the vi-
rus and ensure the resilience of their national health systems. Part of this
response was the closure of borders and the grounding of airlines confirm-

ISBN [ebook] 978-88-6969-442-4
Open access 367
10.30687/978-88-6969-442-4/030
The Political Implications of COVID-19. What now for Populism?
ing that, although a global phenomenon, COVID-19 required first and

foremost a national response. Besides the health dimension, this is
also interesting from a political perspective as COVID-19 emerged
at a time when the retreat of the nation-state and the restoration of
sovereignty were relevant political trends: for example Brexit and
the rise of right-wing populist parties that pledge to restrict immi-
gration and challenge EU expansion. How may we assess the politi-
cal implications of this global crisis, especially given that it comes at
a time when populists, who thrive on the tensions between interna-
tional initiatives and the ‘national preference’, are either in charge,
or the main opposition party, in many countries?
This chapter briefly examines the political implications of
COVID-19, focusing on the potential constraints and opportunities it
poses for populism. This is a new and fluid situation that is fast evolv-
ing. While data is novel and relatively untested, we may still draw
some (cautious) preliminary conclusions by comparing cases in an
attempt to identify broad patterns and exceptions. What follows is
a brief sketch of patterns from which we may identify certain poli-
cy implications and lessons learned. The chapter first outlines a se-
ries of trade-offs with regard to the COVID-19 situation. It then pro-
ceeds to examine the political implications of these trade-offs, before
briefly discussing the challenges and opportunities they represent
for populist actors. Distinguishing between populists in opposition
and populists in power, it concludes with lessons learned and ave-
nues for future research.
2 COVID-19 Trade-offs
According to the 2019 Global Health Security (GHS) Index, fewer

than 5% of countries included in the index scored highly, suggest-
ing that the majority of countries were poorly prepared to respond
to, and mitigate the effect of, a pandemic. The emergence of COV-
ID-19 confirmed this overall lack of preparedness, but also revealed
a paradox: on the one hand, some of the world’s most stable democ-
racies that scored highly in the GHS, such as the UK and the US,
performed particularly poorly. On the other hand, developing au-
thoritarian countries, such as Vietnam, and smaller democracies fa-
tigued by economic and political upheaval in recent years, such as
Greece, outperformed advanced Western democracies in the han-
dling of the pandemic.
In order to explain this variation, preliminary research on this
topic has examined short-term indicators such as the speed with
which distancing measures were introduced, quarantine effective-
ness and willingness to comply (see e.g. Brouard, Vasilopoulos, Be-
cher 2020; Hale et al. 2020; Fenner 2020). This research suggests
that along with long-term infrastructural capacity, short-term polit-

ical decisions have played a very important role in the containment
and mitigation of COVID-19. Responding early is key to responding
effectively, so for example tracking, testing and containing infection
clusters is of paramount importance. Countries that introduced lock-
down measures early tended to have better results, again Greece be-
ing a prime example, though some preliminary work has noted incon-
sistencies with this broad pattern (see Born et al 2020 on Sweden).
This reality highlighted that addressing the pandemic is all about
trade-offs and presented both governments and citizens with some
important dilemmas: does effective health management occur at the
expense of economic growth? Should we introduce – and adhere – to
strict lockdown measures at the expense of our personal liberties?
Should we trade-off these individual liberties for our collective secu-
rity? These trade-offs, in turn, have important political implications
given the delicate political climate – rise of populism, euroscepticism,
Brexit – at the time of the emergence of COVID-19.
3 What Now for Populism?
Far right populist parties, which utilise a rhetoric that combines na-
tionalism and the ‘Popular Will’, have significantly increased their
electoral performance since the 2010s. Examples abound: the French
Front National (FN) (now Rassemblement National), the Dutch Free-
dom Party (PVV), the Austrian Party for Freedom (FPÖ), the Nor -
wegian Progress Party (FrP) and the German Alternative for Ger-
many (AfD) have all mobilised voters on their populist-nationalist
platforms. Their electoral success has been the focus of a substantial
body of literature in the fields of party politics and voting behaviour
(see Mudde, Rovira Kaltwasser 2018; Stockemer, Lentz, Mayer 2018).
Different explanations place varying emphasis on factors including
immigration and cultural insecurity (Inglehart, Norris 2016), eco-
nomic deprivation, both actual and relative (Colantone 2018; Fetzer
2019; Adler, Ansell 2019; Engler, Weisstanner 2020; Halikiopou-
lou, Vlandas 2020), societal decline and status anxiety (Gest 2016;
Gidron, Hall 2019) as well as institutional mistrust and poor evalu-
ations of governance quality (Hooghe, Marien, Pauwels 2011; Ager-
berg 2017). While scholars disagree about the source of the griev-
ance that prompts voters to opt for far right populism, at the core of
the debate is the impact of globalisation (Kriesi et al 2006) that di-
vides societies between winners and losers, thus incentivizing the
discontent to vote for parties that place blame on the establishment.
Populism posits that only decisions made from below are legiti-
mate – and indeed morally superior (Riker 1982), because only these
decisions reflect the will of the people (Mudde 2004). As such, pop-
ulists tend to be sceptical of intermediary institutions, elites and

experts, who they try to discredit. They thrive on an emotive but
often empty rhetoric, aimed at voters motivated by the need to pro-
test their social, economic and/or cultural discontent. Far right pop-
ulism merges this narrative with nationalism. These parties pledge
to speak on behalf of the ‘pure people’, restore national sovereign-
ty, ‘take back control’ from supranational institutions and promote
the ‘national preference’ through strict immigration and citizenship
policies (Halikiopoulou, Vlandas 2019). This suggests competing ex-
pectations regarding the electoral fortunes of far right populist par-
ties in light of the COVID-19 pandemic. On the one hand, the limits
placed on globalisation by the pandemic could reduce the attrac-
tions of populists. In addition, the need to manage the pandemic re-
quires effective government, expertise and efficient democratic in-
stitutions providing the organisational and infrastructural support
that determines state effectiveness. In this respect, COVID-19 could
pose a significant challenge to populists by exposing their lack of
competence, and placing them under scrutiny. In accordance to the
valence model of voting (Evans, Chzhen 2016), which suggests that
party performance evaluations affect voter choices, voters may in-
creasingly prioritise competence over emotive narratives. Populist
parties in opposition may become weakened electorally as non-pop-
ulists in power have tended to consolidate their support during the
pandemic (Bayerlin, Gyongyosi 2020).
On the other hand, potential ‘austerity’ strategies resulting from
the health crisis could exacerbate those voters’ insecurities that
prompt them to support far right populist parties. In addition, pop-
ulists in power could benefit from the crisis by blaming immigrants
and refugees for the spread of the pandemic, using them as an oppor-
tunity for power abuse and an excuse to attack freedom of movement.
Indeed far right populism is compatible with some of the COVID-19
blame-patterns: closure of borders, exclusion of immigrants and an
emphasis on restricting health services for natives. In a number of
cases this has helped populists – or rather right-wing nationalist au-
thoritarians – in power to use the COVID-19 crisis to extend their
powers in the political system. Autocratic-minded leaders, for exam-
ple Orban in Hugary, Modi in India and Bolsonaro in Brazil, have ral-
lied around the flag to increase support at a time of heightened inse-
curity. One important lesson from the past is that, in similar crisis
situations, authoritarian and/or nationalist leaders have taken ad-
vantage of emergencies to consolidate power (Levitsky, Ziblatt 2018).
This suggests that there is a substantial danger of further democrat-
ic backsliding by suspending democratic institutions through emer-
gency laws, for example suspending parliament and ruling by decree.
This raises questions about the utility of the term populism to de-
scribe the challenges to democratic politics both prior to, and after
the emergence of COVID-19. One of the most concerning political

developments regarding actors described as ‘populist’ is not actu-
ally their populism – referred to above as an ideology that draws on
a distinction between the good people and the bad elites (Mudde
2004) – but rather their nationalist, authoritarian and/or a far right
agenda. The coronavirus pandemic has highlighted the extent to
which the term ‘populism’ itself is inflated, overused and too broad
to be analytically useful. Conflating the terms nationalism, right-
wing extremism or authoritarianism, i.e. grouping any party that has
these attributes in the populist category because of these attributes,
means that populism is superfluous and what really matters is the
other attribute: nationalist, far right, or authoritarian for example
(Halikiopoulou, Vlandas 2019). Orban was able to impose undemo-
cratic measures in Hungary not because he is a populist but because
he is authoritarian. Marine Le Pen and Matteo Salvini blame immi-
grants for the pandemic not because they are populists, but because
they are nationalists.
The long-term political consequences of this are significant. In
cases where democratic institutions are weak there is a serious risk
of further democratic backsliding. The long-term economic costs of
the pandemic can only serve to exacerbate this. As a large body of
literature suggests, wealth inequalities, decline of social status, and
limited access to compensation can serve to drive voters closer to
extremism (Adler, Ansell 2019; Gidron, Hall 2019; Halikiopoulou,
Vlandas 2016).
4 Conclusion
In sum, what will determine the direction of future political develop-

ments is the extent to which governments can balance the trade-offs
involved and exit this crisis having simultaneously protected society’s
most vulnerable and retained its democratic institutions and values.
Future research can delve into these dynamics in greater detail.
Comparative research across cases and across time can identify fur-
ther patterns with regard to which populist actors are more likely to
be weakened and why. In the short term, health policies and strin-
gency measures will affect a government’s popularity. But longer
term factors, such as state capacity and the strength and impartial-
ity of a country’s democratic institutions, will determine the extent
to which democracy can withstand the COVID-19 shock. While the
current pandemic may be unique in its specificities, it is not unprec-
edented in terms of what it represents: an emergency situation that
exposes systemic weaknesses and threatens the stability of demo-
cratic societies. Lessons learned from parallel historical precedents
may offer us the benefit of hindsight.
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Pandemics are disruptive events that have profound
consequences for society and the economy. This volume
aims to present an analysis of the economic impact
of COVID-19 and its likely consequences for our future.
This is achieved by drawing from the expertise of authors
who specialise in a wide range of fields including fiscal
and monetary policy, banking, financial markets, pensions
and insurance, artificial intelligence and big data, climate
change, labour market, travel, tourism and politics,
among others. We asked contributing authors to write
their chapters for a non-technical audience so that their
message could reach beyond academia and professional
economists to policy makers and the wider society. The
material in this volume draws from the latest research
and provides a wealth of ideas for further investigations
and opportunities for reflection. This also makes it an ideal
learning tool for economics and finance students wishing
to gain a deeper understanding of how COVID-19 could
influence their disciplines.
Università
Ca’Foscari
Venezia

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Innovation in Business,

Economics & Finance 1

© 2020 Monica Billio, Simone Varotto for the text

Qualunque parte di questa pubblicazione può essere riprodotta, memorizzata in

Edizioni Ca’ Foscari - Digital Publishing

1st edition July 2020

The book has been published in collaboration with the University

PART 1. HISTORICAL PERSPECTIVE

The Global Financial Crisis and the COVID-19 Pandemic

What Can the Black Death Tell Us About

PART 2. FISCAL AND MONETARY POLICY

Recovering from the Economic Impact of COVID-19

The European Repo Market, ECB Intervention

COVID-19 and Fiscal Policy in the Euro Area

The Effects of the COVID-19 Pandemic Through the Lens

Market Risk Measurement

PART 4. FINANCIAL MARKETS

COVID-19 and the Stock Market

Stock Performance When Facing the Unexpected

The COVID-19 Challenge to European Financial Markets

Portfolio Effects of Cryptocurrencies During

PART 5. COMMODITIES AND REAL ESTATE MARKETS

Will COVID-19 Change Oil Markets Forever?

Real Estate and the Effects

PART 6. BUSINESS PERFORMANCE, FUNDING AND GROWTH

Private Equity & Venture Capital

On the Impact of COVID-19-Related Uncertainty

PART 7. PENSIONS AND INSURANCE

The Implications of the COVID-19 Pandemic for Pensions

Insurance Risk Management During Pandemics

PART 8. CLIMATE CHANGE

Pandemics, Climate and Public Finance

Avoiding a Great Depression in the Era of Climate Change

PART 9. LABOUR MARKET

COVID-19 Pandemic and Gender Inequality

India’s Lockdown and the Great Exodus

Human Skills & the AI COVID Challenge

COVID-19 and Its Impacts on Talent Mobility in China

Artificial Intelligence and Data Analytics

Reshaping the Future

PART 11. TRAVEL, TOURISM AND ENTERTAINMENT

Travel and Tourism

European Football After COVID-19

PART 12. POLITICS: PROTECTIONISM AND POPULISM

Why Collaboration Needs to Win Over Protectionism

The Political Implications of COVID-19

Pandemics are disruptive events that have profound consequences

many’s relatively low debt-to-GDP ratio has helped it to implement a

Innovation in Business, Economics & Finance 1 15

question by investigating the risk reduction that may result by di-

the EU Green Deal and the EU corporate taxation policies would be

Innovation in Business, Economics & Finance 1 18

COVID-19 has also accelerated the adoption of digital technolo-

Innovation in Business, Economics & Finance 1 19

The Global Financial Crisis

Alexia Ventula Veghazy

Abstract We sketch possible linkages between features of the 2008-2009 financial

Summary 1 Costly Bank Bailouts. – 2 Constrained SME Credit. – 3 Strict Bank

We aim to sketch possible linkages between features of the 2008-09 finan-

Innovation in Business, Economics & Finance 1

search (including our own, i.e. we are pursuing cross-country and

2008-2009 Global Financial Crisis

Sovereign debt Lack of local economic Bank zombie lending